Financial Ratios, Liquidity and Solvency Metrics for Companies

Financial Ratios and Key Metrics

FM: AC - PC. FM: Net equity (patrimonio neto) + non-current liabilities; current assets (AC).

Ratios

Treasury: achievable total trade receivables + total treasury available / payables short-term (current liabilities). [Range: 1–2]

Liquidity and Current Ratios

Liquidity: AC corrientes / PC corrientes (current assets / current liabilities). [Range: 1–2]

Warranty (Coverage)

Warranty: active / total required. [Range: 1–2]

Availability

Availability: Available / required (liquidity per period). Recoating capacity: debts with balances + liquid assets. [Range: 0.3–0.4]

Financial Autonomy

Autonomía financiera: own resources (r. propios / lesser net) / total callable (non-current liabilities + current). Degree of financial autonomy with respect to external finance. [Range: 0.8–1.5]

Fixed Assets Ratio

Fixed assets: non-current assets / (equity + non-current liabilities). [Should be < 1]

Quality of Debt

Quality of the debt: payables short-term / total required. [Range: 0.2–0.5]

Debt

Debt: total payables / equity.

Profitability and Performance Ratios

Re: (EBIT / assets) × 100.

EBIT: Revenue minus expenditures (operating income).

BAI: BAI = EBIT - interest - taxes. BN: BN = BAI - interest - taxes (net profit).

Ff: (BN / own resources) × 100.

Margin: BN / sales.

Rotation (Turnover): sales / assets.

Leverage: assets / own resources.

Combined Indicators

RF: range × rotation × leverage.

RE: range × rotation × 100.

Basic Accounting Identity

Assets: Liabilities + Net.

Capital / Heritage: equity: assets minus liabilities.

External financing: total external financing and its cost.

Cost d: financial cost / total callable.

Balance Sheet: Causes and Solutions

Financial stability — Consequences (total):

• Excess of own financing:
  • The company is financed only with own resources (r. propios).
  • Total security but cannot benefit from the positive effect of debt.
  • Use of capital: do not borrow gently from others and increase profitability (recommendation: use debt appropriately to improve returns).

Normal financial stability: AC > PC, FM positive.

• This is the ideal situation for the business.
• We only need to monitor the FM (financial margin) according to the company’s activity.

Suspension of payments:

• AC < PC — cannot pay their debts (current assets / payables).
• Expand the payment period to suppliers and better plan available resources.

Financial imbalance (current liabilities > payable):

• FM negative, accumulated losses.
• Decapitalization and very low solvency.
• Re-negotiate business debts with creditors and raise capital.

Bankruptcy:

• FM negative, assets negative, mounting funded losses.
• Decapitalization and total loss of solvency.
• Solutions are very difficult: hard to raise capital and redefine activity; the company may disappear.