Definition of solvency of a company
The company's solvency refers to the company's ability to pay off various debts due and the degree of guarantee, including short-term solvency analysis and long-term solvency analysis. If the company can't make a reasonable analysis of its solvency, its safety and even survival will be threatened.
A company's solvency can be analyzed from two aspects.
1. Short-term solvency. Mainly manifested in the relationship between the company's due debts and disposable current assets, the main measurement indicators are current ratio and quick ratio.
1, current ratio
The most commonly used index to measure the short-term solvency of enterprises. The calculation formula is: current ratio = current assets/current liabilities.
The high current ratio may also be due to the overstock of inventory, excessive accounts receivable, prolonged repayment period and increased prepaid expenses, while the funds and deposits that can really be used to repay debts are seriously insufficient. Generally speaking, business cycle, accounts receivable turnover rate and inventory are the main factors affecting the current ratio.
2. Quick action ratio,
Acidity test ratio refers to the balance of current assets after deducting inventory, sometimes deducting prepaid expenses and prepayments.
The calculation formula is: quick ratio = quick assets/current liabilities.
Quick assets deduct inventory from quick assets because the liquidation speed of inventory is slow, and prudent investors can also deduct it from current assets when calculating quick ratio. An important factor affecting quick ratio is the liquidity of accounts receivable. Investors can consider it together with accounts receivable turnover rate and bad debt provision policy in their analysis. Generally speaking, the reasonable quick ratio is 1.
Second, long-term solvency.
Refers to an enterprise's ability to repay debts of 1 year or more, which is closely related to its profitability and capital structure. The long-term debt capacity of an enterprise can be analyzed by indicators such as asset-liability ratio, ratio of long-term debt to working capital, and interest guarantee multiple.
1, asset-liability ratio
The ratio of total liabilities divided by total assets, the reasonable asset-liability ratio is usually between 40% and 60%, and large enterprises are appropriately larger; However, the financial industry is quite special, and it is normal for the asset-liability ratio to be above 90%.
2. The ratio of long-term liabilities to working capital.
The calculation formula is: the ratio of long-term liabilities to working capital = long-term liabilities/working capital = long-term liabilities/(liquidity-current liabilities).
Because long-term liabilities will be converted into current liabilities over time, current assets must be able to repay the long-term liabilities due in addition to meeting the requirements of repaying current liabilities. Generally speaking, if the long-term liabilities do not exceed the working capital, both long-term creditors and short-term creditors will be guaranteed.
3. Interest guarantee multiple
Total profit (profit before tax) plus the ratio of interest expense to interest expense. Calculation formula: interest guarantee multiple = earnings before interest and tax/interest expense = (total profit+interest expense)/interest expense.
Generally speaking, the company's interest guarantee multiple should be at least greater than 1, and the analysis is usually compared with the company's historical level to evaluate the stability of long-term solvency. From the perspective of robustness, the data of the lowest year should usually be selected as the standard.