Equity Maneuverability Ratio or EMMR
This ratio shows what share of net working capital falls on 1 ruble of equity and is related to indicators of current financial stability.
Maneuverability ratio = (Equity + Long-term debt liabilities – non-current assets) / equity
The maneuverability coefficient helps to understand what part of the equity is in a mobile form. The recommended value of this indicator is 0.5 or more.
In relation to our example, the equity maneuverability ratio is 0.7 and remains unchanged. In the overall picture of the analysis, such a value is puzzling, since the profit in 2015 and the loss in 2016 should inevitably have changed the equity structure. Accordingly, additional research is required.
Using all the above-mentioned coefficients of financial stability indicators, one can draw a conclusion about the solvency of the organization.
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Standards for financial stability indicators
Financial stability at a normal level can be achieved through the following events:
increasing sources of funds;
regulation of the ratio of equity and borrowed funds;
reducing stock levels to the optimal level.
Below is an analysis of financial stability indicators based on the description provided above.
The standard value of the autonomy coefficient, or as it is also called, financial independence, should be no less than 0.5.
A normal ratio of equity to debt is in the range of 0.5 to 0.7%. If this value is above 1, then the probability of bankruptcy is high. This means that there are fewer equity funds in the asset than borrowed funds.
The normal value of the ratio of equity capital in circulation should be more than 0.1. A lower figure indicates that there are not enough funds, and there is an overstatement of credit assets in circulation.
Standards for financial stability indicators
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The value of the coefficient characterizing financial stability in a normal state should be in the range from 0.8 to 0.9.
The standard value of the equity capital maneuverability coefficient is in the range from 0.2 to 0.5. If this value is negative, it means that the company's funds were invested in assets that are difficult to sell, and accordingly, it will be quite difficult to quickly redirect them to cover both long-term and short-term payments. Financial stability in such a situation is at a low level.
Knowing the degree of solvency of the enterprise, one can get an idea of the timeframe, expressed in months, during which it is possible to pay off all existing obligations at the current moment.
The absence of a standard value for the short-term debt ratio indicates positive dynamics of this indicator. In case of its growth, the share of liquid assets in the balance sheet structure should be observed.
The standard value of the current liquidity ratio should be between 1.5 and 2.5%. This indicator adds the overdue debt ratio, and if it grows, the share of short-term sources also increases. Accordingly, the current liquidity ratio also grows. Otherwise, a decrease in the financial stability of the organization is inevitable.
Knowing the main indicators of financial stability, you can determine the solvency of the enterp