What is it? The financial independence ratio is an indicator that demonstrates the stability of a company in the market, how it juggles its assets and liabilities. If it is low, then this is a reason to be wary.
What to consider? There are several formulas for calculating the indicator - a general one and one based on the balance sheet. It is advisable to use all of them, as well as a number of others, to get a general idea of the financial condition of the enterprise.
The article explains:
What does the egypt email list financial independence ratio show?
Why calculate the financial independence ratio
Formula for calculating the financial independence coefficient
Calculation of the financial independence ratio based on the balance sheet
Where to get data for calculating the financial independence ratio based on the balance sheet
Standard value of the financial independence coefficient
Analysis of the financial independence ratio
Example of calculating the financial independence coefficient
Methods of managing the financial stability of a company
Frequently asked questions about the financial independence ratio
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What does the financial independence ratio show?
Every enterprise has assets and liabilities. The former include real estate, property, and everything that can contribute to income. But such assets require financing. For example, an idle production facility will not yield any profit. It needs to be put into operation, resources and workers' labor must be paid for. It is preferable to make such expenses from your own money, rather than from borrowed money.
But not every organization can do without credit money in its work, as it is needed for development and expansion of production. The more funds the bank provides, the more the business depends on it.
The share of assets that are supported by own capabilities characterizes the financial independence or, in other words, the autonomy of the company.
Financial independence ratio
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Such an organization is able to stay on the market longer, as it has sufficient finances to:
Timely closing of all credit obligations. The company is solvent, it has a good credit history, so if it needs another loan, the bank will most likely approve it.
Scaling production and developing new business areas.
Leveling out costs that arise when market conditions change.
The financial independence coefficient can be used to both assess the autonomy of an enterprise and predict its future operation, since it will need to expand and compensate for risks. But to correctly assess the sustainability of an organization, it is necessary to correctly calculate and interpret the result. For example, if the share of assets is lower than the accepted standards, then it is necessary to take into account the accompanying indicators, since with good profitability, a small autonomy coefficient indicates the most efficient distribution of resources.