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104
ISSUES IN THE ANALYSIS OF FINANCIAL STABILITY OF AN
ENTITY
Ziyodinova Nilufar Zarif kizi,
Kokand University,
Assistant professor at
“International tourism and Economics” department,
ORCID iD: 0009-0001-4282-3449
Ashiralieva Shahlokhon Gayratjon qizi,
Ferghana Polytechnic Institute,
Master student in MSc ‘Accounting’,
ORCID iD: 0009-0009-3342-4735
Abstract: Ensuring a company's financial stability is a key factor for its future
success. Therefore, analyzing financial stability serves as the foundation for decision-
making by potential investors, buyers, and suppliers. This article discusses the
necessity and methodology of analyzing a company's financial stability. It examines
solvency analysis for the near future and financial stability analysis for the long-term
perspective.
Keywords: sustainable activities, income, expenses, assets, liabilities, balance,
solvency, long-term assets, current assets, equity, borrowed capital, long-term loans,
long-term credits, short-term loans, short-term credits, own working capital, attracted
funds, coverage ratio.
One of the most significant indicators of a company's stability is its financial
stability. Achieving financial stability is possible if the company's revenues exceed its
expenses. A company can be considered financially stable if it can freely manage its
funds, use them effectively, and maintain a continuous production and sales cycle.
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Financial stability is an integral part of a company's overall stability,
characterized by balanced financial flows and sufficient resources to support the
company's operations over a certain period, including servicing loans and producing
goods.
The financial condition of a company can be evaluated both in the short-term
and long-term. In the short term, the focus is mainly on the company's solvency, while
in the long term, financial stability becomes the priority.
Companies that do not develop financial stability are at high risk of bankruptcy.
Therefore, analyzing financial stability at both macro and micro levels has always been
a critical area of focus for economists.
Financial analysis places significant emphasis on assessing the financial
stability of individual enterprises, firms, and companies, distinguishing between short-
term, medium-term, and long-term evaluation practices, and determining specific
measures to enhance financial stability.
Various systems of indicators are used to assess financial stability, including:
Company solvency
Dependency ratio on own funds
Asset dependency ratio
Interest coverage ratio
Proper formation, allocation, and efficient use of financial resources are
essential factors in ensuring financial stability. In essence, financial stability reflects
how skillfully a company manages its financial resources.
To ensure financial stability, companies should focus on forming initial capital,
organizing production, achieving positive results between income and expenses,
ensuring sufficient working capital, maintaining financial independence, and
protecting business and market activities.
Financial stability is assessed through absolute and relative indicators. Absolute
indicators reflect the state of assets, production reserves, and funding sources over a
specific period. Funding sources include own funds (such as charter capital, reserve
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capital, additional capital, retained earnings, and targeted income), long-term and
short-term loans, and liabilities.
If long-term loans and liabilities dominate asset financing, then short-term
loans and liabilities are commonly used for funding production reserves.
The following indicators are used to determine financial stability:
Long-term assets
Production reserves
Source of funds
Long-term liabilities (loans and debts)
Short-term liabilities (loans and debts)
Diagnosing a company's financial condition and implementing specific
measures for improvement are essential factors in ensuring macroeconomic stability.
Therefore, financial well-being must be prioritized to ensure the company's stable
growth in the future.
A company's financial condition is characterized by the availability of financial
resources, their effective allocation and utilization, financial relationships with other
legal and physical entities, and indicators of solvency and financial stability.
Relative indicators of financial stability describe the maintenance of active
(long-term) and reserve financing, financial stability and dependence, and positive
outcomes from the involvement of own and borrowed funds.
One of the most critical factors in ensuring financial stability is maintaining
order based on the golden rule of economic science, which emphasizes achieving
positive outcomes from activities.
The general formula for this procedure is:
NP
1
/NP
0
> SR
1
/SR
0
> OE
1
/OE
0
> A
1
/A
0
> 1
or
NP
1
/NP
0
* 100 > SR
1
/SR
0
* 100 > OE
1
/OE
0
* 100 > A
1
/A
0
* 100
Where: NP
1
/NP
0
– Growth in net profit; SR
1
/SR
0
– Increase in sales revenue;
OE
1
/OE
0
– Growth of Owner’s Equity; A
1
/A
0
– Growth of assets.
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Asset allocation depends not only on the company's performance but also on
its financial condition.
The primary requirements for liability allocation include maintaining a high
share of private capital in overall financing and ensuring that private capital is not
dependent on borrowed capital. In other words, companies must strive for financial
independence and maintain an appropriate ratio of equity.
The dependency can also be observed in the calculation of indicators
determining the adequacy or inadequacy of own and borrowed funds for financing
reserves and expenses. When own investments are insufficient, attracting long-term
and short-term liabilities becomes a constant requirement for business operations.
Therefore, when using liabilities to finance assets, it is necessary to focus on
profitability ratios and ensuring their continuity.
Financial stability ratios include the equity ratio, debt-to-equity ratio, financial
dependency ratio, mobility ratio of equity, concentration ratio of borrowed financing,
and debt-to-equity ratios. The objective of determining financial stability is to evaluate
the company's ability to cover its liabilities and maintain them over a long period.
The financial condition of a company can be categorized as stable, unstable
(pre-crisis), or crisis. The ability to make timely payments, finance operations on an
extended basis, withstand unexpected shocks, and maintain solvency under adverse
conditions indicates a company's stable financial condition. Conversely, failure to meet
these criteria suggests financial instability.
If current solvency reflects the external aspect of a company's financial
condition, then financial stability represents the internal aspect that ensures long-term
solvency through balanced:
Assets and liabilities,
Income and expenses,
Positive and negative cash flows.
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Further analysis of financial stability indicators in Uzbekistan indicates varying
practices in defining financial stability indicators. The system of indicators can be
grouped into two main components:
1.
Indicators related to the structure of assets, capital, and liabilities, such as
financial independence, financial dependence, solvency, and coverage ratios.
2.
Indicators related to asset financing, such as the availability of own
working capital, debt ratios, financing of inventories with own funds, and net working
capital.
In Uzbekistan and CIS countries, regulatory standards are applied to financial
stability indicators, which differ from international practices. Financial stability is
commonly assessed in absolute terms, focusing on three key indicators:
Availability of own working capital (AOWC),
AOWC = SC - FA
where: SC– sources of own funds; FA – fixed assets (long-term
assets).
Funding of reserves through own and borrowed funds (SFI),
SFI = AOWC + LTL
where: LTL – long-term loans and debts.
Funding of reserves through all resources (SFIR),
SFIR = SFI + STL
Enterprise
solvency
Balanced assets
and liabilities
Balanced income
and expenses
Balanced cash
flows
Financial
stability
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where: STL – short-term loans and debts (including settlements with suppliers
and contractors).
Finally, it is essential to regularly monitor turnover of working capital, improve
asset structure, optimize the credit portfolio, and prepare internal documents that
accurately reflect financial conditions, including solvency, receivables and payables,
and planned expenditures and income. To perform monitoring activities, following
calculations should be done:
Calculation of the availability of funds and the level of inventory financing:
Indicator
Function
State
of
Inventory
Financing (+, -)
Availability of Own Working
Capital (AOWC)
AOWC = SC - FA
AOWC - IC
Availability of Own Working
Capital
and
Long-Term
Loans and Debts (AOWCLD)
AOWCLD = SFI - FA
AOWCLD - IC
Availability of Total Working
Capital (ATWC)
ATWC = SFIR - FA
ATWC - IC
Table 1: Self-made by authors, IC - Inventory and Costs
Additionally, the sufficiency of funds for financing inventories can also be
calculated using the ratio method. Below in the table are the key ratios depicted for this
purpose:
Ratios of Working Capital Provision
Ratio
Formula
Normative Level
Own Working Capital
Provision Ratio
OWC / IC
0.6–0.8
Own Working Capital
and
Long-Term
OWCLD / IC
Minimum 1.0
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Borrowed
Funds
Provision Ratio
Total Working Capital
Provision Ratio
TWC / IC
Above 1.0
Table 2: Self-made by authors
The ratio method plays important in a comparative analysis of the state of
inventory financing and its positive changes. The level of a company's financial
stability can be evaluated based on the current state of inventory financing from
relevant sources. The classification of norms can be summarized as follows:
Classification of Financial Stability
Type
of
Financial
Stability
OWC vs IC
OWCLD vs IC
TWC vs IC
Financial Condition
1. Absolute
Financial
Stability
OWC > IC
OWCLD > IC
TWC > IC
Fully financed by own
funds; no reliance on
external borrowing.
2.
Normal
Financial
Stability
OWC < IC
OWCLD > IC
TWC > IC
Financed by own funds
and long-term loans;
minimal
short-term
borrowing.
3. Unstable
Financial
Condition
OWC < IC
OWCLD < IC
TWC > IC
Reliance on short-term
borrowing;
potential
liquidity risks.
4.
Critical
Financial
Condition
OWC < IC
OWCLD < IC
TWC < IC
Insufficient funds to
cover inventories; high
risk of insolvency.
Table 3: Self-made by authors
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Based on the research done, the following conclusions can be made:
Increase Equity Capital. This can be achieved by increasing revenue and
profitability. Another way to boost equity is to revise the dividend policy of entity.
Optimize accounts receivable and payable by improving the management
of debtors (receivables) and creditors (payables) to ensure timely collections and
payments.
Reassess the company's cash flow management practices.
Improve the company’s asset structure by changing the proportions of
long-term and current assets.
Increase the share of long-term loans meanwhile reducing reliance on
short-term loans as its proportion reduces.
Regular calculations of absolute and relative indicators are needed that
reflect the company's dependence on borrowed funds and its overall solvency.
Monitor the turnover of working capital continuously and pay special
attention to its standardization.
Develop internal documents tailored to the company's needs and provide
a comprehensive picture of issues related to solvency, accounts receivable and payable,
planned expenses, and cash inflows.
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