Techniques of financial situation analysis.

In the course of financial situation analyses we should assess financial stability of an enterprise
and its independence from loans. In international practice there exist 3 methods of financial
situation analyses:
1. Vertical analyses implies examination of proportions between component parts of
assets, revenues, profits and sources of financing.
2. Horizontal analyses includes 2 techniques :
a. Year to Year change analyses
b. Trend series analyses according to trend series analyses we need to chose the
base year and to compare all indicators with result of this base year.
3. Ratio analyses involves examination of relation between two indicators from financial
statements. This method is most popular and widely used in financial situation analyses.
Structure analyses of assets. At the first step of asset analyses we should assess the evolution
and structure off assets using the vertical and horizontal analyses. This analysis is performed on
the base of balance sheet data. Dynamics of evolution and structure of assets. As second stage
of asset analyses we should exam the structure of assets applying the ratio analyses. In
economic practice thee are used the following ratios of structural analyses of assets.
Rate of asset immobilization = Long term assets/Total assets. (r.180 B.S.)/(r.470 B.S.)
This ratio reflects the weight of long term assets in total amount of assets. In order to assess
dynamics of this ratio we should take into consideration operating rate.
Operating rate = Output/Production capacity
Increase in the rate of asset immobilization in case of low level of production capacity rate
shows irrational utilization of enterprises assets. Significant weight of long term assets more
than 17% can create difficulties in those repayments.
Rate of current assets = Current assets/ Total assets (r.460 B.S.)/(r.470 B.S.)
This ratio reflects the weight of current assets in total assets. The safety level of this ratio is
30%. This ratio reflects the level of current assets for each lei of long term assets. The optimal
level of this ratio is less than one.
Rate of technical composition of capital (invested capital or assets) = Fix assets/Current assets
(r.060 - r.080 B.S.)/(r. 460 B.S.)
The optimal level of this ratio is more than one. The rate of technical composition of capital
describes the technical potential of industrial enterprise.
Weight of production assets in total assets = book value of fixed assets + inventories/Total
assets (r. 060 r.080 + r.250 B.S.)/(r.470 B.S.)
This ratio reflects the weight of assets that can be directly used in manufacturing of products
same of goods and rendering of services. Growth of this ratio in dynamics can be assessed
positively because it helps to increase the volume of operating activity, if this ratio of an
enterprise is significantly lower as the average level in the industry it is considered a dangerous
situation for the result of operating activity.