"NEWS of the June 14, 2016-Budget: analysis of strength"

Posted by on Jun 14, 2016

The goal of the analysis of solidity is to check whether the structure characteristics of the enterprise's financial solidity and so a balanced structure in relation to the composition of the sources and use a reasonable degree of independence from third parties.

The construction of margins and indexes documents in order starts from the reclassification of the balance sheet is a financial basis according to functional, classifying and grouping both sources and applications of funds according to the degree of liquidity that according to the membership management area (financial or operational).

Several indices are used for the analysis of dependability.

The starting point is the debt ratio, i.e. the ratio of party means "financial" and equity, known as:

Debt/Equity = net financial position

                           Shareholders ' equity

This index expresses how many times onerous net equity funding is over and then allows you to evaluate the company's reliance by external lenders (banks, other lenders, …).

For example, if q = 2 means that for every dollar made by shareholders, third parties lenders will make 2.

It is clear that the higher the index in the higher exposure in relation to third parties; the balance is achieved as the ratio tends toward unity, even if in any case you can't regardless of the characteristics of the sector.

The net financial position (or debt), an important indicator of sustainability assessment aimed at debt repayment, is determined as the difference between liabilities and financial assets and liabilities (cash, Bank, securities, investments, loans and receivables).

+ Cash and cash equivalents
+ other current financial assets
+ current financial receivables
bank overdrafts
current portion of non-current debt
other current financial liabilities
current finance lease Payables
  Net financial debt
non-current bank debt
bonds issued
other non-current financial liabilities
finance lease Payables non-current
  Non-current financial indebtedness

Another important indicator of solidity assumes that a business situation is balanced when there is a ratio of sources and uses of similar duration: current non-current and non-current loans financed by sources financed from current sources.

The margin that represents this situation is the margin of structure:

Outline margin = equity – non-current assets

that shows how much of non-current assets is covered by shareholders ' equity, which is a source not burdensome and not subject to refund.

It is obvious that the higher the value of the parameter, the stronger will be the company, although hardly in practice you encounter cases of positive margin, given the physiological situation of undercapitalization of Italian companies. A positive margin would mean that shareholders ' equity has financed all fixed assets and also a part of working capital, which means that the company is able to implement development strategies without recourse to external funders.

However, this margin must be interpreted taking into account the particular characteristics of business practiced; and it is precisely to establish a comparison with companies in the same sector that you need to transform the absolute value of the texture, in relative value, building the coverage of fixed assets:

Coverage of fixed assets = equity

                                                                     Non-current assets

For a less severe evaluation of corporate strength and the fact that, as stated above, the operational reality is rare that equity is able to cover the entire investment, another important requirement margin is the margin of secondary structure or expanded:

Secondary structure margin = (shareholders ' equity + long-term liabilities) – non-current assets

If positive, report the existence of a satisfactory correlation between sources and uses; If negative, the judgement is definitely worse than the negative signal from the margin of all negative, because it shows that the fixed assets are partly financed by current liabilities, causing financial imbalance.

by Bruce Ferreira