Financial risk ratio standard. Assessment of financial risks based on financial statements. Financial Risk Ratio - Definition

When an enterprise or company is created, many hope for a long, fruitful and efficient existence. But, alas, this is not always the case. And it is necessary to acquire external debts, and it happens that investments are needed. Thus, there is capital that does not belong to the owner of the enterprise. And along with it, financial risks arise. What it is? What does the financial risk ratio mean? Why is it considered, how is it interpreted?

What is called the Financial Risk Ratio?

To determine the level of potential problems, this indicator is considered. The financial risk ratio (leverage or attraction) indicates the ratio of funds attracted from external sources to own funds. It is a comparative tool that shows the potential level of freedom in decision-making, income distribution, as well as the possibility of attracting additional money for the needs of the enterprise.

Where is it used?

The financial risk ratio plays an important role in the bond, loan and credit markets. Moreover, it has a mutual application: it can be used by both an entrepreneur and a potential investor. For the owner of the company, the financial risk ratio shows the state of the enterprise (and the tendencies to change it - the features of development). Also, informing about it is very important from the point of view of planning the future.

For an investor, the financial risk ratio is an indicator of the stability of the enterprise. So, if we consider a company for which it is 0, we can say that everything was fine with it up to this point. But due to some reason or reasons, things were shaken, so a small financial aid will not interfere with the enterprise. But if the financial risk ratio has reached a value of 1 or even exceeded it, then there are two options:

Ignore this enterprise as such, which constantly needs fin. help. Probably, the situation will not change anytime soon.
Take advantage of the situation by supporting the company. After all, if it still goes bankrupt, then the investor will be able to claim production secrets, territory, buildings, equipment as payment of debts. If the company is of significant interest, then such a scheme looks very real.

But how, in fact, do you know the financial risk ratio? And for this it must be calculated.

How to calculate the financial risk ratio?

It may seem like it's awful to count something. Many economic formulas are a real headache. But not in this case. The balance sheet financial risk ratio is one of the simplest. Let's first take a look at the formula and then move on to explaining it.

K fr = ZK / SK

K fr is the financial risk ratio.
ZK is borrowed capital. Everything that was borrowed from a banking institution or invested by a separate legal entity or individual.
IC is equity capital. This includes all funds that belong to the actual owner / founder of the company, for which the financial risk ratio is calculated.

Interpretation of the obtained values and application in practice

You have calculated the data, received some values - what to do next? What allows us to say about the financial risk ratio? The formula has been used, and now the resulting figures need to be interpreted. This is required in order to assess the financial stability of the enterprise in the event of shocks. The coefficient depicts how many units of attracted funds are attributed to 1 money of your investments. The higher the indicator, the greater the dependence of the company on investors and external debts. The coefficient should be as small as possible. An indicator less than 0.5 is considered optimal. With a value of 1, the enterprise has significant financial risks, and a number of measures must be taken to correct the current situation.

Conclusion

It should be borne in mind that this ratio does not mean that the company is about to go bankrupt, even though it can reach values of 2, 3 or 5. It simply indicates that in the event of some problems, capital flight or something like that, the work of the enterprise can be significantly stalled. For example, you can consider this option: the total capital of the company is 1000 rubles. 200 of them belong to the investor.

If he suddenly withdraws his money, then the remaining 800 will help him survive. But if the values are changed? It is unlikely that 200 rubles will be enough for quality work. And it helps to understand the line when you can take money, and when not, the financial risk ratio. Although the balance sheet formula points to an acceptable margin, borrowing should be treated with caution - after all, someone else's money is taken, and for a short time, and their own money is returned in larger quantities and forever. Optimal action is to reduce the coefficient to zero.

From the article you will learn:

Coefficients of financial stability of the enterprise- these are indicators that clearly demonstrate the level of stability of the enterprise in financial terms. These include the following coefficients.

Independence (autonomy) coefficient

General coefficient of autonomy(or as it is also called - independence coefficient) Is a relative value that determines the level of the company's overall independence in the financial sector, and also shows the share of the company's own funds in the entire amount. The formula for calculating the total coefficient of autonomy looks like this:

КиР - capital and reserves,
RPR - reserves for future expenses
WB - balance sheet currency

- a value that determines the relative share of borrowed capital in the general currency of the balance sheet. This indicator is the inverse of the financial stability ratio and is calculated by the formula:

FD - financial liabilities

The coefficient of maneuverability of the company's own funds- determines what share of the company's own funds is used to finance activities in the short term, i.e. what part of equity is invested in current assets, and what part is capitalized. The calculation is made according to the following formula:

ZiZ - stocks and costs

(also called funding ratio) - a value that determines the share of own funds allocated to cover job responsibilities. The calculation is made according to the formula:

(also called leverage ratio or attraction rate) - shows the ratio of the amount of attracted capital to the amount of own funds. Calculated by the formula:

ЗК - borrowed capital
SK - equity capital

where p. 1400, p. 1500, p. 1300 are the lines of the Balance Sheet (form No. 1).

Financial Risk Ratio - Scheme

Financial Risk Ratio - What It Shows

Shows the share of the company's equity in assets. The higher this indicator, the greater the entrepreneurial risk of the organization. The larger the share of borrowed funds, the less the company will receive profit, since part of it will be spent on repaying loans and paying interest.

A company, most of whose liabilities are borrowed funds, is called financially dependent, the capitalization ratio of such a company will be high. A company that finances its own activities with its own funds is financially independent, the capitalization ratio is low.

This ratio is important for investors who consider this company as an investment. They are attracted to companies with a predominance of equity capital. However, the share of borrowed funds should not be too low, as this will reduce the share of their own profits that they will receive in the form of interest.

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Let's consider financial risk, its types (credit, market, operational and liquidity risk), modern methods of its assessment and analysis, and calculation formulas.

The financial risk of the enterprise. Definition and economic meaning

Enterprise financial risk- represents the likelihood of an unfavorable outcome in which the company loses or loses part of its income / capital. Currently, the economic essence of any enterprise is to create income and increase its market value for shareholders / investors. Financial risks are basic when they affect the result of the financial and economic activities of the enterprise.

And in order for the company to reduce the negative impact of financial risks, methods for assessing and managing its size are being developed. The basic premise put forward by Norton and Kaplan for risk management is that only what can be quantified can be managed. If we cannot measure or quote any economic process, then we will not be able to manage it.

The financial risk of the enterprise types and classification

The process of any analysis and management consists in identifying and classifying the existing risks of an investment project / enterprise / assets, etc. In the article, we will focus more on assessing the financial risks of an enterprise, but many of the risks are present in other economic entities as well. Therefore, the initial task for each risk manager is to formulate threats and risks. Consider the main types of financial risks that stand out in the practice of financial analysis.

Types of financial risks	Description of the types of risk
Credit risk (Credit Risk)	Assessment of credit risk by calculating the probability of default of counterparties in relation to the lender to pay interest on the loan. Credit risk includes creditworthiness and the risk of bankruptcy of the company / borrower
Operational risk (OperationRisk)	Unforeseen losses of the company due to technical errors and failures, deliberate and accidental personnel errors
Liquidity risk (LiquidityRisk)	The solvency of the enterprise - the inability to pay in full to the borrowers at the expense of funds and assets
Market risk (MarketRisk)	The likelihood of a negative change in the market value of an enterprise's assets as a result of the impact of various macro, meso and micro factors (interest rates of the Central Bank of the Russian Federation, exchange rates, cost, etc.)

General approaches to assessing financial risks

All approaches to assessing financial risks can be divided into three large groups:

Estimation of the likelihood of occurrence. Financial risk as the likelihood of an adverse outcome, loss or damage.
Assessment of possible losses in a particular scenario of the development of the situation. Financial risk as the absolute amount of losses possible adverse event.
Combined approach. Financial risk assessment as probability of occurrence and size of losses.

In practice, a combined approach is most often used, because it gives not only the likelihood of risk, but also the possible damage to the financial and economic activities of the enterprise, expressed in monetary terms.

Algorithm for assessing the financial risks of an enterprise

Consider a typical algorithm for assessing financial risks, which consists of three parts. First, the analysis of all possible financial risks and the selection of the most significant risks that can have a significant impact on the financial and economic activities of the organization. Secondly, a method for calculating a particular financial risk is determined, which allows one to quantitatively / qualitatively formalize the threat. At the last stage, the change in the size of losses / probability is predicted under various scenarios of the enterprise's development, and management decisions are developed to minimize the negative consequences.

The influence of financial risks on the investment attractiveness of an enterprise

The investment attractiveness of an enterprise is a set of all indicators that determine the financial condition of an enterprise. Increasing investment attractiveness allows attracting additional funds / capital to increase technological potential, innovation, personnel, production. An integral indicator of investment attractiveness is the criterion of economic value added EVA (EconomicValueAdded), which shows the absolute excess of operating profit over the cost of investment capital. This indicator is one of the key indicators in the strategic management system of the enterprise - in the value management system (VBM, Value Based Management). The formula for calculating economic value added is as follows:

EVA (Economic Value Added)- an indicator of economic value added, reflecting the investment attractiveness of the enterprise;

NOPAT (Net Operating Profit Adjusted Taxes)- profit from operating activities after taxes, but before interest payments;

WACC (Weight Average Cost of Capital)- indicator of the weighted average cost of capital of the enterprise. And it is calculated as the rate of return that the owner of the enterprise plans to receive on the invested equity and debt capital;

CE (Capital Employed)- used capital, which is equal to the sum of fixed assets and working capital involved in the activities of the enterprise (FixedAssets +WorkingCapital).

Since the weighted average cost of capital of an enterprise consists of the cost of borrowed and equity capital, a decrease in the financial risks of an enterprise allows reducing the cost of borrowed capital (interest rates on loans), thereby increasing the value of economic value added (EVA) and the investment attractiveness of the enterprise. The figure below shows the scheme for managing financial risks and investment attractiveness.

Financial risk assessment methods

In order to manage risks, it is necessary to assess (measure) them. Consider the classification of methods for assessing the financial risks of an enterprise, highlight their advantages and disadvantages, presented in the table below. All methods can be divided into two large groups.

So, let's take a closer look at the quantitative methods for assessing the financial risks of an enterprise.

Methods for assessing the credit risks of an enterprise

Credit risk is a component of a company's financial risk. Credit risk is associated with the ability of an enterprise to fail to pay off its obligations / debts on time and in full. This property of an enterprise is also called creditworthiness. The extreme stage of loss of creditworthiness is called the risk of bankruptcy, when the company cannot fully repay its obligations. The methods for assessing credit risk include the following econometric models for risk diagnostics:

Assessment of credit risks according to E. Altman's model

Altman's model allows you to assess the risk of bankruptcy of an enterprise / company or a decrease in its creditworthiness based on the discriminant model presented below:

Z is the final indicator for assessing the credit risk of an enterprise / company;

K 1 - own circulating assets / amount of assets;

K 2 - net profit / total assets;

K 3 - profit before tax and interest payments / amount of assets;

К 4 - market value of shares / borrowed capital;

K 5 - revenue / total assets.

To assess the company's credit risk, it is necessary to compare the resulting indicator with the risk levels presented in the table below.

It should be noted that this model can only be applied to enterprises that have ordinary shares on the stock market, which allows us to adequately calculate the K 4 indicator. A decline in creditworthiness increases the overall financial risk of a company.

Assessment of credit risks according to R. Taffler's model

The next model for assessing the credit risks of an enterprise / company is R. Taffler's model, the calculation formula for which is as follows:

Z Taffler - assessment of the credit risk of an enterprise / company;

K 1 - an indicator of the profitability of the enterprise (profit before tax / current liabilities;

K 2 - indicator of the state of working capital (current assets / total liabilities);

K 3 - the financial risk of the enterprise (long-term liabilities / total assets);

К 4 - liquidity ratio (sales proceeds / total assets).

The resulting value of credit risk must be compared with the level of risk, which is presented in the table below.

Taffler's criterion
>0,3	Low risk
0,3 – 0,2	Moderate risk
<0,2	High risk

Assessment of credit risks according to the model of R. Lis

In 1972, the economist R. Lees proposed a model for assessing credit risks for UK enterprises, the calculation formula for which is as follows:

K 1 - working capital / amount of assets;

K 2 - profit from sales / amount of assets;

K 3 - retained earnings / total assets;

K 4 - equity / debt capital.

In order to determine the level of credit risk, it is necessary to compare the calculated Lis criterion with the level of risk presented in the table below.

Fox criterion	Credit risk (probability of bankruptcy)
>0,037	Low risk
<0,37	High risk

Operational risk assessment methods

Operational risks are one of the types of financial risk. Consider a method for assessing operational risks for companies in the banking sector. According to the basic technique ( BIA) assessment of operational risks ( Operational Risk Capital,ORC) the financial institution calculates a reserve that should be allocated annually to cover this risk. So in the banking sector, a risk equal to 15% is taken, that is, every year banks must reserve 15% of the average annual gross income ( GrossIncome,GI) over the past three years. The formula for calculating operational risk for banks will be as follows:

Operational risk= α x (Average gross income);

α - coefficient established by the Basel Committee;

GI is the average gross income for each type of bank activity.

Standardized methodology for assessing operational risksTSA

Complicating the BIA methodology is the TS method, which calculates deductions for operational risks arising in various functional areas of the bank's activities. To assess operational risks, it is necessary to highlight the areas where they can arise, and what kind of impact on financial activities they will have. Let's look at an example of assessing a bank's operational risks.

Functional activities of the bank	Deduction rate
Corporate finance(provision of banking services to clients, government agencies, enterprises in the capital market)	18%
Trade and sale(transactions in the stock market, purchase and sale of securities)	18%
Banking services for individuals persons(servicing individuals, providing loans and credits, consulting, etc.)	12%
Banking services for legal entities	15%
Payments and transfers(settlement of accounts)	18%
Agency services	15%
Asset Management(management of securities, cash and real estate)	12%
Brokerage activity	12%

As a result, the sum of the total deductions will be equal to the sum of deductions for each allocated function of the bank.

It should be noted that, as a rule, operational risks are considered for companies in the banking sector, not industrial or manufacturing. The fact is that most operational risks arise from human error.

Liquidity risk assessment method

The next type of financial risk is the risk of loss of liquidity, which shows the inability of an enterprise / company to repay its obligations to creditors and borrowers on time. This ability is also called the solvency of the enterprise. In contrast to creditworthiness, solvency is taken into account the possibility of debt repayment not only at the expense of cash and quickly liquid assets, but also at the expense of medium-liquid and low-liquid assets.

To assess the liquidity risk, it is necessary to evaluate and compare with the standards the basic liquidity ratios of the enterprise: the current liquidity ratio, the absolute liquidity ratio and the quick liquidity ratio.

Formulas for calculating the liquidity ratios of the enterprise

Analysis of various liquidity ratios shows the ability of an enterprise to repay its debt obligations using three different types of assets: fast liquid, medium liquid and low liquid.

Market risk assessment method - VAR

The next type of financial risk is market risk, which is a negative change in the value of the assets of an enterprise / company as a result of changes in various external factors (industry, macroeconomic and microeconomic). For a quantitative assessment of market risk, the following methods can be distinguished:

VaR method (Value at Risk).
Shortfall method (Shortfall at Risk).

Risk assessment methodVaR

The VAR method is used to assess market risk (Value at Risk), which allows you to estimate the probability and amount of losses in the event of a negative change in the company's value on the stock market. The calculation formula is as follows:

where:

V is the current value of the company's / enterprise's shares;

λ is the quantile of the normal distribution of the company's / enterprise's stock returns;

σ is the change in the profitability of the company's / enterprise's shares, reflecting the risk factor.

A decrease in the value of shares leads to a decrease in the market capitalization of the company and a decrease in its market value, and, consequently, investment attractiveness. You can learn more about how to calculate the VaR risk measure in Excel in my article: ““.

Risk assessment methodShortfall

Shortfall Market Risk Assessment Method (analogue:Expected Shorfall, Average value at risk, Conditional VaR) more conservative than the VaR method. The risk assessment formula is as follows:

α is the selected level of risk. For example, these can be values 0.99, 0.95.

The Shortfall method better captures heavy tails in the distribution of stock returns

Summary

In this article, we examined various methods and approaches to assessing the financial risks of an enterprise / company: credit risk, market risk, operational risk and liquidity risk. In order to manage risk, it is necessary to measure it, this is the basic postulate of risk management. Financial risk is a complex concept, therefore, assessing various types of risk allows us to weigh possible threats and develop a set of measures to eliminate them.

Financial risk indicator makes it possible to determine the probability of formation and the level of possible losses. If a comprehensive risk assessment is carried out, then for each value of losses it is also necessary to establish the probability of their occurrence.

Financial risk zones

It should be noted that in most cases a simplified approach is used, which allows an assessment to be made based on one or more of the most important criteria. One of the main indicators of financial risk is the amount of possible losses. Allocate the so-called acceptable risk zone, in which the predicted one exceeds the possible losses.

The next zone, which is called the area of critical risk, is characterized by the excess of the amount of losses over the amount of expected profit. There is also a zone of catastrophic risk, the level of costs in which reaches a critical value, sometimes equal to the entire state of the entrepreneur. If the predicted losses exceed the financial capabilities of the businessman, then they are not considered, since they cannot be recovered.

Statistical method for assessing the indicator of financial risk

Its use involves the study of statistical data on losses that took place in a similar business. And also the reasons for their occurrence and frequency are established. If the statistical one is large enough, then this makes it possible to create a financial risk graph, which is nothing more than a curve of probable losses.

It should be noted that the frequency of occurrence of financial losses is determined by dividing the corresponding number of cases by the total number of transactions concluded. Moreover, the latter value must also include those that have brought benefits to the entrepreneur. Otherwise, the indicators of the level of financial risks and the threat of losses will be overestimated.

Expert method for assessing the indicator of financial risk

It is also called the method of expert assessments. The implementation of this method involves processing the opinions of entrepreneurs or specialists with extensive experience in a particular area. It is recommended to carefully study the experts' assessment regarding the likelihood of loss occurrence, as well as their level. This will make it possible to determine the average values and build a probability distribution curve by analyzing the totality of expert assessments.

Quite often, experts are asked to analyze not the entire spectrum of probable risks, but only to identify four characteristic points at which the maximum level of possible losses is observed. But this approach is recommended only for a large array of expert assessments.

Calculation and analytical method for assessing the indicator of financial risk

Its use presupposes the application of applied theory, which underlies the creation of the probable loss curve. At the same time, it should be borne in mind that in-depth research was carried out only in the field of gambling and insurance risk. Whereas the use of mathematical methods to assess the level of financial risk is currently considered ineffective.

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