Capital structure indicators show. The capital structure ratio is the basis for assessing the solvency of a business and its financial condition. Coverage ratio of non-current assets

The second group of indicators that we analyze within the framework of this methodology are capital structure indicators (financial stability ratios), which reflect the ratio of equity and borrowed funds in the organization’s sources of financing, i.e. characterize the degree of its financial independence from creditors. To construct a methodology for recognizing the latent stage of the crisis, the following indicators were identified (Table 4.4):

1) Share of equity capital in working capital, or equity ratio(K 9), calculated as the ratio of own funds in circulation to the entire value of current assets. The indicator characterizes the ratio of own and borrowed working capital and determines the degree of provision of the organization's economic activities with its own working capital necessary for its financial stability.

2) Autonomy coefficient(K 10), or financial independence, calculated as the quotient of equity capital divided by the amount of the organization's assets, and determining the share of the organization's assets that are covered by equity capital (provided by its own sources).

The remaining share of assets is covered by borrowed funds. The indicator characterizes the ratio of the organization's own and borrowed capital.

3) Ratio of total liabilities to total assets(K 11) - an indicator reflecting the share of assets that is financed through long-term and short-term loans.

Table 4.3

Solvency indicators

№ p/p	Index	Conditional designation	Index calculation formula	Calculation formula coefficient	Range of values	Number meaning signal
	Index of growth (decrease) in the ratio A 2 /P 2			K 2 = (line 230+line 240)/ line 690 form No. 1

					0.8≤I 1<0,9
					0.7≤I 1<0,8
					0.5≤I 1<0,7

	Index of growth (decrease) in the degree of overall solvency			K 2 = (DO + KO)/ V avg K 2 = (line 690 + p. 590 of form No. 1)/ V av m

					1,1
					1,2


	Index of growth (decrease) of the debt ratio for bank loans and loans			K 3 = (DO + Z)/ V avg K 3 = (line 590 + p. 610 of form No. 1)/ V av m

					1,1
					1,2


	Index of growth (decrease) of debt ratio to other organizations			K 4 = KZ/ V avg K 4 = (line 621+p.622+ +p.623+p.627+ +p.628 form No. 1)/ V av m

					1,1
					1,2


	Index of growth (decrease) of the debt ratio to the fiscal system			K 5 = ZB/ V avg K 5 = (line 625 + p. 626 of form No. 1)/ V av m

					1,1
					1,2


	Index of growth (decrease) of the domestic debt ratio			K 6 = ZV/ V avg m K 6 = (line 624+p.630+ +p.640+p.650+ +p.660 form No. 1)/V avg m

					1,1
					1,2


	Index of growth (decrease) in the degree of solvency for current liabilities			K 7 = KO/ V avg K 7 = page 690 of form No. 1/ V av m

					1,1
					1,2


	Index of growth (decrease) in coverage of current liabilities by current assets			K 8 =OA/KO K 8 = page 290/page 690 form No. 1

					0.8≤I 8<0,9
					0.7≤I 8<0,8
					0.5≤I 8<0,7

Table 4.4

Capital structure indicators

№ p/p	Index	Conditional designation	Calculation formula index	Calculation formula coefficient	Range of values	Number meaning signal
	Index of growth (decrease) in the equity ratio			K 9 = SK-VA/OA K 9 = (p. 490-p. 190)/p. 290 of form No. 1)

					0.8≤I 9<0,9
					0.7≤I 9<0,8
					0.5≤I 9<0,7

	Index of growth (decrease) of the autonomy coefficient			K 10 = SK/ (VA + OA) K 10 = line 490/(line 190+ line 290 of form No. 1)
					0.9≤I 10<1
					0.8≤I 10<0,9
					0.7≤I 10<0,8
					0.5≤I 10<0,7

	Index of growth (decrease) in the ratio of total liabilities to total assets			K 11 = (DO+KO)/ (BA+OA) K 11 = (p.590+p.690)/ (p.190+p.290 of form No. 1)
					1
					1,1
					1,2
					1,5

	Index of growth (decrease) in the ratio of long-term liabilities to assets			K 12 =DO/ (VA+OA) K 12 = p. 590/ (p. 190 + p. 290 of form No. 1)
					1
					1,1
					1,2
					1,5

	Index of growth (decrease) in the ratio of total liabilities to equity capital			K 13 = (DO+KO)/ SK K 13 = (line 590+line 690)/ line 490 form No. 1
					1
					1,1
					1,2
					1,5

	Index of growth (decrease) in the ratio of long-term liabilities to non-current assets			K 14 =DO/VA K 14 = line 590/line 190 of form No. 1
					1
					1,1
					1,2
					1,5

Legend for Table 4.4: SC – capital and reserves of the organization; VA – non-current assets.

4) Long-term liabilities to assets ratio(K 12) shows the share of assets financed by long-term loans.

5) Ratio of total liabilities to equity(K 13) – the ratio of credit and own sources of financing.

6) Ratio of long-term liabilities to non-current assets(K 14) shows what share of fixed assets is financed through long-term loans.

3. Third group - indicators of efficiency in the use of working capital, profitability and financial results, assessing the velocity of circulation of funds invested in current assets. In this methodology, they are supplemented by working capital coefficients in production and in calculations, the values of which characterize the structure of current assets (Table 4.5):

1) Working capital ratio (K 15 ) is calculated by dividing the organization's current assets by average monthly revenue and characterizes the volume of current assets, expressed in the organization's average monthly income, as well as their turnover. This indicator assesses the velocity of circulation of funds invested in current assets.

2) Working capital ratio in production (TO 16 ) is calculated as the ratio of the cost of working capital in production to average monthly revenue. Working capital in production is defined as funds in inventories, including VAT, minus the cost of goods shipped.

The ratio characterizes the turnover of an organization's inventory. Its values are determined by the industry specifics of production and characterize the efficiency of the organization’s production and marketing activities.

3) Working capital ratio in calculations (K 17 ) determines the circulation rate of the organization’s current assets that are not involved in direct production. It characterizes, first of all, the average terms of settlements for shipped but not yet paid products, that is, it determines the average terms for which working capital in settlements are withdrawn from the production process. Also, it can give an idea of how liquid the products produced by the organization are, and how effectively its relationships with consumers are organized, characterizes the likelihood of doubtful and bad receivables and their write-off as a result of non-receipt of payments, that is, the degree of commercial risk.

4) Return on working capital (K 18 ) reflects the efficiency of using working capital. The index determines how much profit accrues per ruble invested in current assets.

5) Return on sales (K 19 ) reflects the ratio of profit from product sales and income received in the reporting period (Table 4.5).

Table 4.5

Indicators of efficiency in the use of working capital, profitability and financial results

№ p/p	Index	Conditional designation	Calculation formula index	Formula calculation coefficient	Range of values	Number signal value
	Index of growth (decrease) in the working capital ratio			K 15 = OA/V avg m K 15 = page 290 of form No. 1/ V avg m
					0.9≤I 15<1
					0.8≤I 15<0,9
					0.7≤I 15<0,8
					0.5≤I 15<0,7

	Index of growth (decrease) in the working capital ratio in production			K 16 = OSB/V avg K 16 = (p. 210+ p. 220-p. 215 of form No. 1)/ V av m
					0.9≤I 16<1
					0.8≤I 16<0,9
					0.7≤I 16<0,8
					0.5≤I 16<0,7

	Index of growth (decrease) of the working capital ratio in calculations			K 17 = OSR/ V avg K 17 = (p. 290-p. 210 + p. 215 of form No. 1)/ V av m
					0.9≤I 17<1
					0.8≤I 17<0,9
					0.7≤I 17<0,8
					0.5≤I 17<0,7

	Index of growth (decrease) in working capital profitability			K 18 = P / OA K 18 = page 160 of form No. 2 / page 290 of form No. 1
					0.9≤I 18<1
					0.8≤I 18<0,9
					0.7≤I 18<0,8
					0.5≤I 18<0,7

	Index of growth (decrease) in profitability of sales			K 19 = P pr / V K 19 = line 050 / line 010 of form No. 2
					0.9≤I 19<1
					0.8≤I 19<0,9
					0.7≤I 19<0,8
					0.5≤I 19<0,7

	Index of growth (decrease) in average monthly output per employee			K 20 = V av m / SCR K 20 = In average m / line 760 of form No. 5
					0.9≤I 20<1
					0.8≤I 20<0,9
					0.7≤I 20<0,8
					0.5≤I 20<0,7

Average monthly output per employee ( K 20 ) determines the efficiency of using the organization’s labor resources and the level of labor productivity, and also characterizes the financial resources for conducting business activities and fulfilling obligations, reduced to one employee of the analyzed organization (Table 4.5).

Designations for table 4.5:

OSB – working capital in production;

OSR – working capital in settlements;

P – profit after paying all taxes and deductions;

P pr – profit from sales; B – the organization’s revenue;

SHR – the average number of employees of the organization.

4. The last group of indicators included in the methodology is indicators of efficiency of use of non-working capital and investment activity, characterizing the efficiency of use of the organization's fixed assets and determining how much the total volume of available fixed assets (machinery, equipment, buildings, structures, vehicles) corresponds to the scale of the organization's business.

We used the following indicators (Table 4.6):

1) Efficiency of non-working capital, or return on assets (TO 21 ), which is determined by the ratio of average monthly revenue to the cost of non-current capital and characterizes the efficiency of using the organization's fixed assets.

A value of this indicator that is lower than the industry average indicates insufficient utilization of equipment if the organization did not acquire new expensive fixed assets during the period under review.

While a very high value of this indicator may indicate both the full load of equipment and the lack of reserves, and a significant degree of physical and moral wear and tear of outdated production equipment.

2) Investment activity coefficient (K 22 ), characterizing investment activity and determining the amount of funds allocated by the organization for modification and improvement of property, as well as for financial investments in other organizations.

Strong deviations of this indicator in any direction may indicate an incorrect development strategy of the organization or insufficient management control over the activities of management.

3) Profitability ratio of non-current assets (K 23 ), demonstrating the organization’s ability to provide a sufficient amount of profit in relation to fixed assets.

4) Return on Investment Ratio (K 24 ), showing how many monetary units the organization needed to obtain one monetary unit of profit. This indicator is one of the most important indicators of competitiveness.

Designations for table 4.6:

NA – intangible assets;

OS – fixed assets.

Table 4.6

Indicators of efficiency of use of non-working capital and investment activity

№ p/p	Index	Conditional designation	Index calculation formula	Formula for calculating the coefficient	Range of values	Number meaning signal
	Index of growth (decrease) in capital productivity			K 21 = V av m /VA K 21 = In average / page 190 of form No. 1
					0.9≤I 21<1
					0.8≤I 21<0,9
					0.7≤I 21<0,8
					0.5≤I 21<0,7

	Index of growth (decrease) of the investment activity coefficient			K 22 =(VA-NA-OS)/ VA K 2 =(p.130+p.135+ Page 140)/ page 190 of form No. 1
					0.9≤I 22<1
					0.8≤I 22<0,9
					0.7≤I 22<0,8
					0.5≤I 22<0,7

	Index of growth (decrease) in the profitability ratio of non-current assets			K 23 = P /VA K 23 = page 160 of form No. 2 / page 190 of form No. 1
					0.9≤I 23<1
					0.8≤I 23<0,9
					0.7≤I 23<0,8
					0.5≤I 23<0,7

	Index of growth (decrease) of return on investment ratio			K 24 = P /(SK+DO) K 24 = line 160 of form No. 2 / (line 490+line 590 of form No. 1)
					0.9≤I 24<1
					0.8≤I 24<0,9
					0.7≤I 24<0,8
					0.5≤I 24<0,7

After assigning a numerical value to each signal about the threat of a hidden crisis (s i, i=1..n, where n is the number of indicators selected for analysis), it is proposed to aggregate the received data into a table of the following form:

Table 4.7

Numerical values of signals about the threat of crisis

№ p/p	Signal of a crisis	Numerical value of the signal

Such tables must be constructed for each group of indicators.

Next, it is proposed to introduce two intermediate indicators (S – counter of true conditions, and F – counter of the total strength of signals about the threat of a hidden crisis), which are calculated using the following algorithm:

To calculate the scale of the threat of a hidden crisis for each group of indicators or for the organization as a whole, it is proposed to use the following formula:

where M is the scale of signals about the threat of a hidden crisis;

n – the number of analyzed indicators for the group or the organization as a whole.

The scale of signals about the threat of a crisis characterizes the crisis in terms of its breadth of coverage and gives an idea of the number of areas covered by a hidden crisis, or in which the development of a crisis is possible in the near future.

It is proposed to calculate the intensity of the crisis threat using the formula:

(4.39)

where I′ is the intensity of signals about the threat of a hidden crisis;

r – dimension of the scale of numerical values of signals (here r=5).

The intensity of signals about the threat of a crisis characterizes the crisis in terms of the depth of its coverage and gives an idea of the level of threat of the development of a hidden crisis.

The scale and intensity of signals about the threat of a crisis are proposed to be assessed on the following scale (Table 4.8):

Table 4.8

Linguistic assessment of the scale and intensity of signals about the threat of a crisis

№ p/p	Numerical value of the indicator	Linguistic assessment of the indicator	Forecast
		extremely low	Potential
			Potential
			Hidden crisis	Nascent
				Developing
		extremely high		Progressive

Indicator values above 40% allow us to conclude that there is a hidden crisis in the organization.

With indicator values less than 40%, the likelihood of a latent crisis is low; the condition is characterized as a potential crisis with the subsequent possible development of a latent crisis.

1) The methodology developed and presented by us allows us to recognize the earliest stages of a crisis, including the stage of a latent crisis, which are characterized by the absence of visible symptoms of the development of crisis phenomena and cannot be diagnosed by standard methods;

2) When constructing the methodology, a system of indices was used that allows one to evaluate the performance indicators of an organization over time, which gives a more objective assessment of the development of crisis phenomena in the organization and makes it possible to take into account even minimal deviations in its work;

3) The linguistic scale for assessing signals about the threat of a crisis allows us to draw not just a conclusion about the presence or absence of a hidden crisis, but also to calculate the scale and intensity of the development of the crisis;

4) The developed methodology allows us to assess the crisis both in terms of breadth and depth of coverage, which allows us to further develop a set of appropriate measures to localize and overcome the hidden crisis in the organization.

Capital structure indicators are intended to show the degree of possible risk of bankruptcy of an enterprise in connection with the use of borrowed financial resources. Indeed, if an enterprise does not use borrowed funds at all, then the risk of bankruptcy of the enterprise is zero. As the share of borrowed capital increases, the risk of bankruptcy increases and the volume of the enterprise's liabilities increases. This group of financial ratios is primarily of interest to the company’s existing and potential creditors. The company's management and owners evaluate the enterprise as a continuously operating economic entity. Lenders have a two-pronged approach. Lenders are interested in financing the activities of a successfully operating enterprise, the development of which will meet expectations. Along with this, they must take into account the possibility of negative developments and the possible consequences of non-payment of debt and liquidation of the company. Creditors do not receive any benefits from the successful operation of the company: interest is simply paid on time and the capital amount of the debt is repaid. Therefore, they must carefully analyze the risks that exist for repaying the debt in full, especially if the loan is for a long period. Part of this analysis is to determine how strong a claim for debt recovery would be if the company were to experience significant difficulties.

Generally, conventional creditors are repaid after paying taxes, paying back wages, and satisfying secured loans against specific assets, such as a building or equipment. Assessing a company's liquidity allows one to judge how protected an ordinary creditor is. The group of financial ratios discussed below helps determine the company's dependence on debt capital (how the company uses financial leverage) and compare the positions of creditors and owners. A separate group is formed by financial indicators that characterize the company’s ability to service debt using funds received by the company from its continuous operations.

In accordance with the previously discussed concept of financial leverage, the successful use of borrowed funds increases the profits of the owners of the enterprise, since they own the profit received on these funds in excess of the interest paid, which leads to an increase in the company's equity.

From the point of view of the lender, the debt in the form of interest payments and repayment of the principal (capital) amount of the debt must be paid to him even if the profit received is less than the amount of payments due to him. The owners of the company, through its management, must satisfy the claims of creditors, which can have a very negative impact on the company's equity.

The positive and negative impact of financial leverage increases in proportion to the amount of borrowed capital used by the enterprise. The lender's risk increases along with the owners' risk.

The debt-to-asset ratio represents the primary and broadest assessment that can be made when attempting to assess a lender's risk. This indicator is calculated using the formula:

The calculation using this formula is made for a point in time, and not for a period. This coefficient determines the share of “other people’s money” in the total amount of claims against the company’s assets. The higher this ratio, the greater the likely risk for the lender.

The calculation results for SVP for three time points are shown below:

These data indicate that about 50 percent of the sources of financial resources were obtained by the enterprise from borrowed sources. The question arises: is this good or bad? There is no clear answer to this question. It all depends on the preferences of the company’s owners and its management, specifically on their attitude to risk. Managers seeking to avoid the risk of bankruptcy by all means will seek to reduce this indicator and attract additional financial resources by issuing new shares. Managers and owners of a company who are committed to risk will, on the contrary, increase the share of liabilities, seeking to increase profits through positive financial leverage. But here there is a contradiction with potential sources of borrowed funds. In fact, an increase in the share of borrowed resources in a company's capital structure leads to an increase in risk not only for the company itself, but also for its potential creditors. And if a company is not able to demonstrate its good “credit history,” then it will not be able to count on receiving an additional loan. A situation arises in which the managers of an enterprise would like to receive an additional loan, thereby increasing the indicator under consideration, but who will give it to them? At the same time, there are very reputable companies that have demonstrated their high creditworthiness, and lenders are willing to lend money to these companies, despite the high ratio of debt to total assets. An example of such a company is General Motors Inc., which has a value of this indicator at 90%.

The SVP enterprise is not among the “credit-reliable” enterprises due to its short lifespan, and therefore a debt-to-total assets ratio of 50 percent can be considered critical for this enterprise in the sense that it is unlikely to be able to count on receiving a new loan. loan. A slight decrease in this indicator in the XY year was the result of a significant reduction in accounts payable.

However, it cannot be stated unequivocally that the given indicator is an absolutely correct assessment of how much the company can repay its debts. The fact is that the balance sheet amount of assets does not always correspond to the real economic value of these assets or even their liquidation value. In addition, this ratio does not give us any insight into how the amount of profit a company makes may change, which could affect interest payments and capital repayments.

The debt to capitalization ratio is an indicator that is formed using the ratio of long-term debt to the capitalization amount. This indicator gives a more accurate picture of a company's risk when using borrowed funds. By capitalization we mean the total amount of the company's liabilities excluding its short-term liabilities. This indicator is calculated using the formula:

By definition, capitalization includes the amount of long-term claims against the company's assets, both from lenders and owners, but does not include current (short-term) liabilities. The total amount corresponds to what we call net assets if no adjustments have been made, such as eliminating deferred taxes. If deferred tax is not eliminated, then the calculation of this indicator for the SVP company leads to the following results:

If we exclude the amount of deferred taxes, the coefficient values will be respectively equal to: 23.73%, 19.34% and 16.63%. There is a decrease in the ratio of debt to capitalization due to the repayment of part of a long-term bank loan.

Much attention is paid to this ratio because many loan agreements for a given company, whether it is a closely held private company or a public company, contain certain conditions governing the maximum share of the company's borrowed capital, expressed as the ratio of long-term debt to capitalization.

A similar characteristic, but expressed in the form of a different ratio, is the ratio of debt and equity capital. This indicator is directly related to the previous one and can be calculated directly using it. In fact, let D be the amount of long-term debt, E be the company's equity capital, and y denote the ratio of debt to capitalization, i.e. y = D / (D+E). If we now use z = D / E to denote the ratio of debt to equity, then it is easy to obtain that z = y / (1 - y). Let's calculate the debt to equity ratio

This indicator easily interprets the state of the capital structure. A potential creditor clearly sees that, for example, as of 01/01/XZ, the company's long-term debt is about 21 percent of its equity capital. Provided that the company has sufficiently high liquidity (i.e. the ability to repay its short-term debts), it may be granted additional credit. Note that having only the value of the first indicator considered in this group, we would not be able to draw such a conclusion, since there long-term debts were not separated from short-term ones.

The debt-to-equity ratio measures the proportion of borrowed financial resources used and is calculated as the ratio of total debt, which includes current liabilities and all types of long-term debt, and the company's total equity. This coefficient shows in another form the relative shares of claims of lenders and owners and is also used to characterize the company's dependence on borrowed capital. For the SVP company this indicator has the following meanings:

The existence of different options for structure indicators highlights how carefully the rules of financial analysis and the conditions governing the provision of a particular loan are developed. But ratios provide only a first general idea of the risk-reward balance when using borrowed funds. The next step is indicators characterizing debt servicing.

One of the factors for ensuring the financial stability of an organization is planning a rational capital structure and the maximum level of debt load. As practice shows, there is no single correct and universal solution for everyone, and the choice of criteria for optimizing the level of debt is an immediate task of the financial management of each specific company.
Summarizing the existing system of indicators characterizing the level of debt burden of companies, we can conditionally distinguish three main groups of indicators:

Indicators characterizing the relationships between the components of the capital structure:

Financial leverage ratio, defined as the ratio of debt to equity (total debt to equity, TD/EQ).

, (15)
Despite the fact that in numerous literature one can find a recommended maximum level of financial leverage of up to 1, it is worth noting that it can vary significantly depending on the situation in the financial market, industry specifics, as well as the financial and investment policies of the company. This ratio can be calculated based on both the book value and the market value of equity.
A certain type of financial leverage is the ratio of long-term debt to equity (LTD/EQ).
(16)
Despite the fact that this indicator is used quite often in financial analytics, it is worth noting that in the case of a significant share of short-term liabilities in the structure of liabilities, as well as if they are largely formed through bank loans, the exclusion of this item from the analysis of capital structure indicators may lead to incorrect conclusions.

Total debt to total assets (TD/TA) characterizes the share of assets that is financed by borrowed funds, regardless of the source of formation.

The indicator “Long-term debt to total assets” (LTD/TA) demonstrates what share of assets is financed by long-term liabilities.

Long-term debt to capital (LTD/Capital) ratio, calculated as the ratio of long-term liabilities to permanent capital.

Indicators characterizing the level of collateral for liabilities with assets.

Asset coverage ratio, which characterizes the company's ability to pay off its obligations using its available assets. It is calculated as the ratio of net tangible assets to long-term liabilities.

Current ratio (CR), characterizing the company's ability to pay off short-term obligations using current (current) assets.

(21)

Net working capital (NWC), showing the portion of current assets that is financed from equity and long-term liabilities. An increase in the value of this indicator characterizes an increase in the company's liquidity and a decrease in the risks of loss of financial stability.

Net debt to total assets (ND/TA) ratio. Net debt is calculated as the sum of liabilities minus cash and cash equivalents (short-term financial investments).

(23)

Debt service indicators.

Interest coverage ratio (ICR), which is the ratio of earnings before interest and taxes (EBIT) to interest payable.

(24)
This ratio can be calculated based on cash flow from operating activities.
(25)

Fixed payment coverage ratio (debt coverage ratio, debt service coverage ratio, DCR), characterizing the organization’s ability to generate appropriate sources of repayment of obligations. In this case, the numerator can use both cash flow from operating activities, increased by interest payable and taxes, and earnings before interest, taxes, depreciation and amortization (EBITDA).

Cash maturity coverage ratio (CMC), which reflects the company's ability to pay long-term liabilities as they fall due.

(27)

Cash flow adequacy ratio (CFA), which is the ratio of the annual net free cash flow (NFCF) to the average annual debt payments for the next five years. Using the average amount of payments on debt obligations allows you to smooth out possible unevenness in the repayment schedule of the principal debt.

(28)
The ratio of net debt to profit is usually EBITDA (debt to EBITDA ratio).
Let us summarize the coefficients presented above in Figure 6.

Figure 6. Indicators characterizing the level of debt burden

Due to the fact that the most important part of a company’s financial policy is the attraction of borrowed funds, there is a need to determine the acceptable level of debt load, which will help increase the value of the business and at the same time ensure an acceptable level of risks. The concept of the financial leverage effect states that it is possible to increase the debt portfolio until the cost of attracting financing is lower than the return on assets, and each additional borrowed ruble increases the return on equity. Thus, with infinitely available borrowed funds at a price not exceeding the profitability of the business, an infinite sales market and well-functioning business processes, the maximum level of debt burden will tend to infinity. However, the real situation is characterized by the fact that funding volumes are limited; scaling a business can lead to a decrease in its efficiency. In addition, this model does not take into account the fact that with an increase in financial leverage, the likelihood of a loss of financial stability increases, which in turn increases the credit risk that determines the cost of funds raised. Accordingly, when determining the target level of debt burden, it is necessary to take into account all these factors.
Based on the provisions (regulations), we will analyze the procedure for establishing restrictions on the amount and structure of borrowed capital.
Most provisions regulating the procedure for determining the level of a company's debt load use the following terminology.
Debt position- depending on the context, total debt capital, short-term debt capital or long-term debt capital.
Limits debt burden - values of indicators characterizing the level of debt burden (capital structure limits, debt structure limits, debt coverage limits, interest coverage limits, etc.). In this case, as a rule, the target and maximum permissible value of the limits are set. This scale is the basis for forming a company’s credit rating (Table 4).
Table 4. The procedure for forming a company’s credit rating

The financial powers of management depend on the credit rating (credit rating group). So, if an organization is classified as group A, management has the right, without the approval of the Board of Directors, to carry out credit operations (raising loans, borrowings, issuing and placing debt securities, leasing operations, etc.) to attract borrowed capital within the debt position limit. With a “B” credit rating, management carries out credit operations subject to approval by the Board of Directors of a temporary increase in the target value of the limits. If a company is assigned to the “B” credit rating group, credit transactions are possible only with the approval of these transactions by the Board of Directors.
Debt Position Limit- the amount of the debt position corresponding to the maximum permissible value of the limits.
Appendix 4 presents the limits that determine the maximum debt load of several companies.
Quite often, the level of debt burden (size of debt position and debt load limits) is determined on the basis of general practice, established industry proportions, and comparison with similar companies. This approach is described by the Informational cascades theory, proposed by S. Bikhchandani, D. Hirshleifer and I. Welch, which is based on the “herd behavior” of agents: “the optimal behavior strategy of an individual is to repeat the actions (or decisions) of his predecessors, who find themselves in a similar situation, regardless of the personal information they have." With regard to determining the debt burden, this theory gives rise to the following effects:

Copying the capital structure of an industry leader company (or similar companies), as well as using the industry average (or median) debt load as a guideline.
Using the most popular methods for forming the procedure for determining the maximum values of the debt position. An analysis of the provisions (regulations) on the debt policy of several companies in different industries gives grounds to assert that a standard approach to establishing the maximum level of debt burden is often used. On the other hand, in conditions of broad functionality and limited time resources for management, as well as in the absence of clear formalized models, such an approach may be justified.

At the same time, it should be noted that capital structure management will be more effective if the level of debt burden is determined taking into account how the ratio between debt and equity will affect the value of the company. This provision is consistent with the concept of value-based management (VBM), within which one of the drivers (factors) of business value is capital structure management, leading to a decrease in the weighted average cost of capital (WACC), and therefore to an increase in the value of the company (in particularly the EVA indicator).
Taking this approach into account, when determining the level of debt load, it is important for the company not only to determine the limits of the debt load, which determine the maximum value of the company's debt position, but also to calculate the credit capacity.
Credit capacity(debt capacity) - an indicator characterizing the company’s ability to attract borrowed funds to finance its activities, calculated as the optimal amount of debt.
From a mathematical point of view, optimization is finding the extremum (minimum or maximum value) of the objective function.
When managing capital structure, a financial manager can use:

maximizing the market value of equity or total invested capital;
maximizing value for stakeholders;
maximizing net earnings per share (EPS) over the expected earnings before interest and tax (EBIT) range;
minimizing risks at an acceptable level.

Figure 7. Methods for determining the optimal debt load
Depending on the selected objective function, the following methods for quantitatively substantiating the level of debt burden and credit capacity of a company are possible (Fig. 7):

Minimum weighted average cost of capital (WACC) model - the optimal level of debt burden is achieved at a minimum cost of capital.
S. Myers adjusted present value (APV) method. Just like the WACC model, it involves determining the capital structure at which the value of the company will be maximum, taking into account the benefits of the tax shield and the costs of financial instability.
The EBIT volatility method allows you to determine the acceptable level of debt burden based on the probability of financial difficulties acceptable to the company (probability of default on obligations). It is assumed that the probability of default and the volatility of operating income are linearly dependent.
The EBIT-EPS analysis model involves choosing a capital structure that will maximize earnings per share (EPS). The independent variable in this model is operating profit, the value of which is determined by the level of operational risk. The method of comparing funding sources involves constructing a linear EBIT-EPS relationship and choosing for the predicted EBIT value a capital structure that maximizes the EPS value.

The practical methods presented above for assessing the optimal level of debt burden are consistent with the theories of capital structure discussed in the first chapter. Table 5 presents only those capital structure theories that assume the existence of an optimal level of financial leverage. In other words, the Modigliani-Miller theorem and the theory of the hierarchy of funding sources are excluded from the table.
Table 5. Coordination of theories and practical approaches to the formation of an optimal capital structure

Theoretical approach	Practical approach
Traditional approach	Method for minimizing the weighted average cost of capital
Compromise theories	S. Myers adjusted present value method (APV method). EBIT volatility method.
Agency theories	Management of the temporary capital structure aimed at eliminating possible conflicts of interest. Financial contracts (loan agreements and issue documents), including tools for resolving agency conflicts (for example, covenants).
Theory of information cascades	1. Copying the capital structure of an industry leader company (or analogue companies). 2. Using the industry average (or median) value of the debt burden as a guideline. 3. Using the most popular methods for forming the procedure for determining the maximum values of the debt position.

Below we will consider the procedure for applying each method separately to assess the credit capacity of a company.

Below is a list of financial ratios most commonly used in financial analysis. These indicators are divided into five groups, reflecting various aspects of the financial condition of the enterprise:

Liquidity ratios
Capital structure indicators (sustainability ratios)
Profitability ratios
Business activity ratios
Investment criteria

For some indicators, recommended ranges of values are also given. The values most often mentioned by Russian experts are taken as such ranges. It should, however, be remembered that acceptable values of indicators can differ significantly not only for different industries, but also for different enterprises of the same industry, and a complete picture of the financial condition of a company can only be obtained by analyzing the entire set of financial indicators, taking into account the specifics of its activities. Therefore, the given indicator values are purely informational and cannot be used as a guide to action. The only thing that can be noticed is that if the indicator values differ from the recommended ones, then it is advisable to find out the reason for such deviations.

I. Liquidity Ratios - Liquidity ratios

Liquidity indicators characterize the company's ability to satisfy the claims of holders of short-term debt obligations.

1. Absolute liquidity ratio

Shows what share of short-term debt obligations can be covered by cash and cash equivalents in the form of marketable securities and deposits, i.e. almost completely liquid assets.

2. Quick ratio (Acid test ratio, Quick ratio)

The ratio of the most liquid part of current assets (cash, accounts receivable, short-term financial investments) to short-term liabilities. It is usually recommended that the value of this indicator be greater than 1. However, real values for Russian enterprises are rarely more than 0.7 - 0.8, which is considered acceptable.

3. Current ratio (Current Ratio)

It is calculated as the quotient of current assets divided by short-term liabilities and shows whether the enterprise has enough funds that can be used to pay off short-term liabilities. According to international (and Russian) practice, the liquidity ratio values should range from one to two (sometimes up to three). The lower limit is due to the fact that working capital must be at least sufficient to pay off short-term obligations, otherwise the company will be at risk of bankruptcy. An excess of current assets over short-term liabilities by more than three times is also undesirable, since it may indicate an irrational asset structure.

Calculated using the formula:

Recommended values: 1 - 2

4. Net working capital, in monetary units

The difference between a company's current assets and its short-term liabilities. Net working capital is necessary to maintain the financial stability of the enterprise, since the excess of working capital over short-term liabilities means that the enterprise not only can pay off its short-term obligations, but also has reserves for expanding activities. The optimal amount of net working capital depends on the characteristics of the company’s activities, in particular on its scale, sales volumes, the speed of inventory turnover and accounts receivable. A lack of working capital indicates the inability of an enterprise to repay short-term obligations on a timely basis. A significant excess of net working capital over the optimal requirement indicates an irrational use of enterprise resources. For example: issuing shares or obtaining loans in excess of real needs.

Capital structure indicators reflect the ratio of equity and borrowed funds in the company’s sources of financing, i.e. characterize the degree of financial independence of the company from creditors. This is an important characteristic of enterprise sustainability. To assess the capital structure, the following ratios are used:

5. Financial independence ratio (Equity to Total Assets)

Characterizes the firm's dependence on external loans. The lower the ratio, the more loans the company has, the higher the risk of insolvency. A low value of the ratio also reflects the potential danger of a cash shortage for the enterprise. The interpretation of this indicator depends on many factors: the average level of this ratio in other industries, the company’s access to additional debt sources of financing, and the characteristics of current production activities.

Calculated using the formula:

Recommended values: 0.5 - 0.8

6. Total liabilities to total assets (Total debt to total assets)

Another option for presenting the company's capital structure. Demonstrates what proportion of a company's assets is financed by borrowing.

7. Long-term debt to total assets

Demonstrates what proportion of the enterprise's assets is financed by long-term loans.

Calculated using the formula:

8. Total debt to equity

The ratio of credit and own sources of financing. Just like TD/TA, it is another form of presenting the financial independence ratio.

9. Long-term debt to fixed assets

Demonstrates what share of fixed assets is financed by long-term loans.
Calculated using the formula:

10. Interest coverage ratio (Times interest earned), times

Characterizes the degree of protection of creditors from non-payment of interest on the loan provided and demonstrates: how many times during the reporting period the company earned funds to pay interest on loans. This indicator also allows you to determine the acceptable level of reduction in profits used to pay interest.

Profitability ratios show how profitable a company's operations are.

11. Return on sales ratio, %

Demonstrates the share of net profit in the company's sales volume.

Calculated using the formula:

12. Return on shareholders’ equity, %

Allows you to determine the efficiency of use of capital invested by the owners of the enterprise. Typically, this indicator is compared with possible alternative investments in other securities. Return on equity shows how many monetary units of net profit earned each unit invested by the company's owners.

Calculated using the formula:

13. Return on current assets, %

Demonstrates the company’s capabilities in ensuring a sufficient amount of profit in relation to the company’s working capital used. The higher the value of this ratio, the more efficiently working capital is used.

Calculated using the formula:

14. Return on fixed assets, %

Demonstrates the ability of the enterprise to provide a sufficient amount of profit in relation to the company's fixed assets. The higher the value of this ratio, the more efficiently fixed assets are used.

Calculated using the formula:

15. Return on investment, %

Shows how many monetary units the company needed to obtain one monetary unit of profit. This indicator is one of the most important indicators of competitiveness.

Calculated using the formula:
. Activity ratios - Business activity ratios

Business activity ratios allow you to analyze how efficiently a company uses its funds.

16. Net working capital turnover ratio, times

Shows how effectively a company uses investments in working capital and how this affects sales growth. The higher the value of this ratio, the more effectively the company uses net working capital.

Calculated using the formula:

17. Fixed assets turnover ratio, times

Capital productivity. This coefficient characterizes the efficiency of the enterprise's use of available fixed assets. The higher the ratio, the more efficiently the company uses fixed assets. A low level of capital productivity indicates insufficient sales or too high a level of capital investment. However, the values of this coefficient differ greatly from each other in different industries. Also, the value of this coefficient greatly depends on the methods of calculating depreciation and the practice of assessing the value of assets. Thus, a situation may arise that the fixed asset turnover rate will be higher in an enterprise that has worn-out fixed assets.

Calculated using the formula:

18. Total assets turnover - Asset turnover ratio, times

Characterizes the efficiency of the company's use of all available resources, regardless of the sources of their attraction. This coefficient shows how many times per year the full cycle of production and circulation is completed, bringing a corresponding effect in the form of profit. This ratio also varies greatly depending on the industry.

Calculated using the formula:

19. Stock turnover ratio, times

Reflects the speed of inventory sales. To calculate the coefficient in days, you need to divide 365 days by the value of the coefficient. In general, the higher the inventory turnover ratio, the less funds are tied up in this least liquid asset group. It is especially important to increase turnover and reduce inventories if there is significant debt in the company’s liabilities.

Calculated using the formula:

20. Accounts receivable turnover ratio (Average collection period), days.

Shows the average number of days required to collect a debt. The lower this number, the faster the receivables turn into cash, and therefore the liquidity of the company’s working capital increases. A high ratio may indicate difficulties in collecting funds from accounts receivable.

Calculated using the formula:

V. Investment ratios -

Investment criteria.

21. Earnings per ordinary share

One of the most important indicators affecting the market value of a company. Shows the share of net profit (in monetary units) per ordinary share.

Calculated using the formula:

22. Dividends per ordinary share

Shows the amount of dividends distributed on each common share.

Calculated using the formula:

23. Ratio of stock price and earnings (Price to earnings), times

This ratio shows how many monetary units shareholders are willing to pay for one monetary unit of the company's net profit. It also shows how quickly an investment in a company's shares can pay off.

Debt capital concentration ratio -balance formula will be discussed below - reflects the degree of debt burden on the enterprise. Let us study the specifics of calculating this indicator, as well as the interpretation of its value.

How to calculate the debt concentration ratio (balance sheet)

The coefficient in question shows the ratio of assets formed through external loans to the total capital of the enterprise. In fact, it is the degree of debt burden on the company. This takes into account both short-term and long-term loans.

The debt capital concentration ratio is determined by the formula:

KZ = SD / PO,

KZ - debt capital concentration ratio;

SD - the amount of short-term and long-term debts at the end of the analyzed period;

PO - the amount of the organization's liabilities as of the end of the analyzed period (balance sheet currency).

If the analyzed period is 1 year, then the SD indicator will correspond to the sum of the values of lines 1400 and 1500 of the organization’s balance sheet. Software indicator - the value in line 1700 (the sum of indicators in lines 1300, 1400 and 1500 of the balance sheet).

Concentration ratios of own and borrowed funds: relationship between indicators

Very close in essence and economic meaning to the coefficient of concentration of borrowed funds is another indicator - the coefficient reflecting the concentration of the enterprise's equity capital.

It is calculated by the formula:

KS = SK / PO,

KS is a coefficient reflecting the concentration of equity capital;

SK is the amount of the company's equity capital.

The IC indicator is located on line 1300 of the enterprise’s balance sheet.

The higher the KS coefficient, the better. It is welcome if its value exceeds 0.5 (that is, the company has 50% or more of its own capital). What is the optimal value of the coefficient reflecting the concentration of debt capital?

Debt capital concentration ratio: optimal value

The concentration ratio for borrowed capital is normalized based on the specifics of business processes at a particular enterprise. The industry-wide unofficial standard is 0.5 or less (thus, the company is allowed to have up to 50% of borrowed capital).

A common approach is to evaluate the coefficient in question over time. Its growth may indicate difficulties in business management or that the enterprise is forced to develop mainly through borrowed funds.
Another approach is to estimate the coefficient in average values. So, if at the beginning of the reporting period it is 40%, and at the end - 60%, then its average value will correspond to the industry-wide norm.

In general, a debt capital concentration ratio below 0.5 is considered a positive criterion when assessing the effectiveness of enterprise management. It is obvious:

the lower the debt burden on the company, the less capital will be diverted to pay interest to the creditor;
The more the enterprise has its own funds to service its activities, the better the turnover indicators and the efficiency of using working capital.

In turn, too low KZ indicators - for example, less than 0.1 - may indicate that the company, for some reason, is unable to take out loans that may be needed.

A low ratio can be formed due to the fact that potential lenders refuse loans to a company, considering its business model not stable enough. Another possible reason for such a policy of creditors is that the company does not have a sufficient amount of liquid assets that could be used as collateral.

Results

The debt capital concentration ratio reflects the share of the enterprise's assets formed from borrowed funds. This indicator is calculated using the balance sheet. Its optimal value is in the range of 0.1-0.5. The considered coefficient complements the coefficient of concentration of equity capital in economic sense - its optimal value, in turn, should be above 0.5.

You can learn more about the specifics of capital formation in an enterprise in the articles:

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