Coefficient of own funds - an indicator of reliable financial stability

The activity of the enterprise can be analyzed on the basis of certain indicators. They are calculated in order to determine how effective the business entity is, whether it is expedient to resort to lending activities and what are its further prospects.

One of the most important areas of analysis is financial sustainability, which characterizes the enterprise's ability to independently finance its activities. The level of stability is determined by a number of indicators, based on the calculation of which conclusions are drawn about the reliability of a particular economic entity.

The ratio of own funds is an indicator from a group of those that characterize financial sustainability. It is defined as the ratio of own circulating capital and working capital of the enterprise:

Kos = SOK / OS,

Where SOK is the value of own circulating capital,

OS - the size of working capital.

Own circulating capital is an indicator that is the difference between equity and the value of non-current assets:

SOK = SK-NoA,

Where SC is the amount of equity,

ButA is a non-current asset.

Sometimes, to more accurately determine your own circulating capital, the value of non-current assets is deducted from the amount of equity, future period income and the reserve of future expenses. But, as a rule, this is applicable for large enterprises, because in the small and medium business, the last two indicators are mostly absent in the composition of the balance sheet.

The ratio of own funds means its ability to finance activities at the expense of working capital, without resorting to borrowed funds. The optimal result is when the value of the indicator is more than 0.1. Sometimes this indicator is also defined as the ratio of working capital. The algorithm for calculating it is identical to the technique of the indicator described.

Along with this, there is still a coefficient of supply of reserves with own circulating assets. It is found by dividing your own circulating capital by the amount of stocks (the value is taken from form 1 of the financial statements - balance sheet):

Koz = SOK / Zap, where Zap is the amount of reserves.

This indicator, as well as the ratio of own funds, reflects the degree of sustainability of the enterprise and demonstrates how much the material stocks are covered by the sources of financing of the enterprise itself. Its recommended value should exceed 0.5, although the higher the value of the coefficient, the better for the enterprise. In practice, this happens rarely.

There are cases when the values of these coefficients may be negative. This occurs when non-current assets exceed their own funds. Then the indicator of own circulating capital has a negative value, which, in turn, is reflected in all calculation results. This situation at the enterprise indicates that not only negotiable, but also fixed assets are covered by borrowed funds.

The ratio of own funds, first of all, is calculated for production enterprises, because they have large volumes of stocks and the main source of financing is current assets. Interested in such indicators mainly partners and investors, because they provide an opportunity to assess the reliability of the enterprise.