Autonomy coefficient, also called coefficient. financial independence, determines the ratio of equity capital to the total capital of the organization. In other words, this coefficient. shows how independent the enterprise is from attracting capital from third-party sources of financing. The higher its value, the more stable the organization’s position and the less dependent it is on creditors.
Formula for calculating the autonomy coefficient
Coeff. autonomy is calculated as follows:
Ka = Equity / Assets (formula 1)
Own funds = Liabilities – Borrowed capital.
Borrowed capital, in turn, consists of short-term and long-term liabilities.
When directly calculating this coefficient. according to the balance sheet (form No. 1), the formula will look like this:
Ka=p.1300/p.1700 (formula 2),
where line 1300 reflects the sum of all the organization’s own sources of funds (authorized capital, reserve and additional capital, retained earnings),
and line 1700 is the sum of all liabilities (capitals and reserves, short-term and long-term liabilities of the organization).
Coeff. auto – one of the main indicators used to analyze the financial stability of an organization. The purpose of the analysis is to assess the solvency of the enterprise, its efficiency and financial stability.
For this analysis, 2 modifications of the coefficient are used. autonomy. They are completely equivalent to each other and the choice of one or the other depends only on the preferences of the analyst.
One of the options has already been discussed above (see the paragraph “formula for calculating the coefficient of auto”).
And the second option looks like this:
Ka = Own capital / Balance sheet currency (formula 3)
The analytical note must indicate which calculation option is used. This is necessary in order to correctly assess the absolute value of the calculated indicator. After all, for formula 1 the minimum acceptable indicator is 0.5. And in the case of calculating the coefficient. auto according to formula 3, this value will be equal to 1.
A decrease in the indicator signals an increase in risk and a decrease in the financial stability of the enterprise. In addition, as the share of liabilities increases, not only the risk of non-repayment increases, but also interest expenses.
The autonomy ratio is of great importance for lenders. The higher this indicator, the lower the risk of losing their invested funds.
The autonomy ratio is a convenient and effective indicator of the financial stability of a company. It is calculated as the ratio of equity capital to business assets, based on the balance sheet information (Form No. 1). The meaning of Equity to Total Assets is of interest to partners, creditors, investors, and owners. Its standard value is from 0.5. If the indicator approaches one, then the company is stable, but does not use debt financing enough, which hinders its growth.
Lenders are willing to cooperate with companies that are able to repay their financial obligations on time. Therefore, they assess in advance whether the company is able to cover its obligations with its own capital and reserves. This criterion also characterizes the financial stability of the business.
Autonomy coefficient(Equity to Total Assets - EQ/TA, KA) or indicator of financial independence is a relative financial indicator that allows you to determine the degree of dependence of a company on debt financing, as well as its ability to repay obligations using its own funds.
Reference! CA is used in the practice of arbitration managers, who are obliged to establish the financial condition of the company before starting bankruptcy proceedings in relation to it (Resolution of the Government of the Russian Federation of June 25, 2003 No. 367 “On approval of the rules for conducting financial analysis by an arbitration manager”).
Analysts use the financial independence ratio to assess the financial strength of a business and assess the likelihood of its bankruptcy.
Reference! The inverse of the autonomy indicator is the financial dependence coefficient, and its analogue is the bankruptcy forecast coefficient.
The reduction in Equity to Total Assets is the first sign that the company requires checking for the likelihood of bankruptcy (bankruptcy forecast coefficient, capitalization ratio, etc.). If this trend is prolonged, then investors and business lenders should consider their injections.
Formula for calculating the autonomy coefficient
The current value of the EQ/TA indicator can be determined on the basis of information from reporting form No. 1 - the balance sheet. To do this, you need to take information from it:
- Total assets (p. 1300).
- Total equity capital and reserves (p. 1700).
Important point! When calculating the KA indicator, all assets are taken into account, regardless of their degree of liquidity.
The theory of financial analysis uses the following formula for determining EQ/TA:
KA = SK/SA, where:
CA - total assets;
SK - equity capital and reserve reserves.
In the practice of Russian companies, the above formula is expressed through the lines of the balance sheet (form No. 1):
KA = page 1300 / page 1700
Important point! If you add long-term liabilities to equity when calculating, you get a financial stability ratio.
Standard indicator value
The Equity to Total Assets indicator can be applied to organizations of any sector of the economy, any scale of activity and form of ownership. Its normative meaning is also universal and uniform for all business entities.
Important point! When conducting detailed financial analysis, they compare the obtained value with the average indicators in the selected sector of the economy.
When analyzing the indicator, it is important to take into account some assumptions:
- the higher the value of the financial autonomy indicator, the more stable the position of the enterprise seems;
- if the autonomy coefficient is close to 1, then it is believed that business development is hampered by insufficient use of debt financing.
Examples of coefficient calculation
The calculation and analysis of the EQ/TA indicator is most conveniently presented using the example of specific Russian companies. The objects of study were selected:
- oil company PJSC Bashneft;
- one of the leaders in online retail trade, NEPAO Yulmart.
Conclusion! An analysis of the financial independence of PJSC Bashneft showed that in 2015-2017. the company is becoming increasingly dependent on debt sources of financing. In 2017, the indicator falls below the normative limit. This state of affairs is due to the reorganization of the oil giant in 2015, which led to a gradual reduction in the amount of equity capital.
Conclusion! The Yulmart company's degree of independence from external sources of financing is growing due to the fact that, in conditions of an unstable macroeconomic situation and the volatility of the ruble exchange rate, it decided to follow the strategy of using its own sources of financing its activities.
The overall result of the analysis: the position of the Yulmart trading company in 2017 is more stable than that of the oil giant Bashneft. The sample shows an algorithm for using the autonomy coefficient formula in the Excel spreadsheet editor.
Autonomy coefficient is one of the key indicators of the group, so it is often called financial independence ratio. In the economic literature there are also other names for the autonomy coefficient, used as synonyms:
- independence coefficient;
- ownership ratio;
- equity concentration ratio;
- Equity Ratio (Equity to Total Assets).
The autonomy ratio is a financial formula that reflects the share of equity capital used to finance the company's assets. The autonomy ratio excludes any debt financing used by the company to raise funds.
What is the autonomy coefficient?
Autonomy coefficient- this is calculated as the company’s ratio to its . The values of these two components are often taken from (the so-called), but the ratio can also be calculated using assets and capital if companies are trading on.
The balance sheet formula is as follows:
Assets = Capital + LiabilitiesConsequently, all assets of the organization are formed from two sources: capital (own funds) and liabilities (borrowed funds). Based on the above formula, it follows that the company’s capital is equal to the amount of assets minus liabilities, or the so-called amount. That's why it is sometimes said that autonomy coefficient represents the ratio net assets To common assets enterprises.
The autonomy ratio is a fairly popular financial ratio, especially in Europe and Japan, while in the United States the ratio commonly used is , which is calculated as a ratio to .
Calculation of the autonomy coefficient
The financial independence ratio is calculated by dividing a company's equity by its total assets. To the amount own funds (equity capital) refers to target (special) financial funds, and other items reflected in the “capital” line of the balance sheet. Total assets represent the sum of all and taken into account on .
Formula for calculating the autonomy coefficient:
Autonomy ratio = Equity / Total assetsAn example of calculating the autonomy coefficient
The company's balance sheet shows that equity is $540,000 and total assets are $1 million. The autonomy coefficient in this case will be:
Autonomy coefficient = 540,000 / 1,000,000 = 0.54This means that the assets that the company has are 54% financed by business owners, i.e. For every $1 of assets, the owners' contribution is 54 cents, so 46 cents is the contribution.
Autonomy coefficient value
The autonomy coefficient reflects the overall level of the company and allows you to analyze. A higher equity ratio (autonomy) or higher shareholder contribution to capital indicates a better long-term company. A low autonomy coefficient, on the contrary, carries a higher one.
The ownership ratio highlights two important financial concepts for a solvent and sustainable business. The first component shows what proportion of the company's assets belongs directly to the owners (shareholders). In other words, how many assets will remain “in the hands” of business owners after repaying all existing ones.
The second component, on the contrary, shows how effectively the company uses borrowed resources. If the autonomy ratio shows how many of the company's assets were financed by shareholders (investors), then the reverse calculation (1 - autonomy ratio) shows the share of assets that were financed by creditors.
In world practice, the normative value of the autonomy coefficient is at the level 0.5 and above. The higher the better, because a higher value of the autonomy coefficient indicates a higher level of financial stability of the company, and, accordingly, a higher level of . For companies with a high rate, it is not only easier to attract borrowed funds, in particular, but also cheaper - it can be close to the rate.
A low value of the autonomy coefficient indicates increased risks for creditors, which can provoke not only payments, but also lead the company to. Therefore, creditors fix the maximum permissible values of the equity capital concentration ratio. For example, it sets the maximum permissible value of the autonomy coefficient at 0.3 (taking into account the size of the loan that the potential intends to attract). In domestic practice, banks sometimes issue loans to borrowers with a low autonomy coefficient (0.3 and below), but only against highly liquid collateral or after provision or a third party with a high level of solvency.
Standard values for the autonomy coefficient may also vary depending on the industry of the company. Thus, for enterprises in capital-intensive industries, the value of the financial independence coefficient will be significantly higher than, for example, for companies in the trade sector. This is explained by the fact that in practice, long-term (non-current) assets are usually financed from equity capital.
The importance of the autonomy coefficient
The autonomy ratio is a good indicator of the level of financial leverage used by a company. A low equity concentration ratio will produce good results for shareholders if the company earns a return on assets that exceeds the interest rate paid to creditors.
The importance of the autonomy coefficient is as follows. Companies with a higher equity ratio must pay less interest, so the "saved" money can be used to grow the company or make an additional payment. On the contrary, a company with a low autonomy ratio is more susceptible to losses, since a significant part of its income is spent on paying interest to creditors.
Additionally, a high equity ratio allows for greater access to capital at lower interest rates. On the other hand, the low autonomy coefficient makes it difficult to obtain and. Even if such companies manage to obtain a loan, its cost will be significantly higher.
One of the characteristics of a stable position of an enterprise is its financial stability.
Below financial stability ratios, characterize independence for each element of the enterprise’s assets and for property as a whole, making it possible to measure whether the company is financially stable enough.
The simplest financial stability ratios characterize the relationship between assets and liabilities as a whole, without taking into account their structure. The most important indicator of this group is autonomy coefficient(or financial independence, or concentration of equity in assets).
The stable financial position of an enterprise is the result of skillful management of the entire set of production and economic factors that determine the results of the enterprise. Financial stability is determined both by the stability of the economic environment within which the enterprise operates, and by the results of its functioning, its active and effective response to changes in internal and external factors.
Before investing their savings in a particular project, any investor will want to first analyze the main economic indicators both for the reporting period and for the planned one. These certainly include the autonomy coefficient, which is often also called the financial stability coefficient (independence, ownership, leverage, equity ratio). Any audit of economic activity cannot do without it, so it has long been rightfully considered a classic indicator that must be taken into account when drawing up any business plan.
What does the autonomy coefficient show?
This indicator allows you to get a clear picture of how much a company depends on creditors. The lower the autonomy coefficient, the lower the financial stability, and vice versa. Of course, it is possible to do without a loan in business, but this happens quite rarely. After all, when starting and expanding activities or during long-term capital re-equipment of production facilities, a fairly large amount of funds is often required, which not everyone has available. From this point of view, the lack of borrowed funds can lead to a loss of competitiveness or technological lag behind market leaders. Therefore, if the autonomy coefficient shows 0, this does not mean that the company is doing well. What then should we focus on? In order to assess the financial autonomy of a company, it is customary to compare the calculated values with domestic and foreign standards. Our economists believe that the optimal value lies in the range of 0.6-0.7. And in world practice the interval is 0.3-0.4. This difference can be explained by the fact that in the West, reputation and timely fulfillment of one’s obligations to creditors are of great importance in business.
How is the financial autonomy ratio calculated?
The formula for calculating this indicator is extremely simple: all you need to do is find the ratio of equity capital to the total assets of the company:
Ka = Sk/Ca, where
SK - total capital, the source of which is the sum of lines 490, 640, 650 of the balance sheet;
Sa - total assets, which are indicated in line 700 of Form 1 (balance sheet).
If the resulting value is less than 0.5, this indicates that the company is experiencing certain difficulties with working capital, and for the investor this indicates the risk of insolvency, and therefore a possible loss of investment.
Nuances
It should be borne in mind that depending on the industry and location of the enterprise, the autonomy coefficient may vary, so it should always be considered in dynamics or in comparison with a similar indicator of competing firms. The higher the capital intensity of production, the more the enterprise depends on long-term sources of funds, and therefore, the share of its own capital should be quite high. And vice versa, if the share of raw materials and materials in the cost is high, then in this case the autonomy coefficient may well be lower than the standard one.
