Standard value of the financial independence coefficient
Posted: Sat Jan 18, 2025 6:19 am
Normally, the financial independence ratio should be at least 0.5. The higher the value of the indicator, the more stable the company feels. For a more in-depth analysis of financial stability, the value of the ratio is compared with the average indicators for the industry in which the organization operates.
If the KFN is close to 1, this indicates that the development of the enterprise is slow. Without attracting borrowed funds, it deprives itself of additional finances for the growth of assets, which would allow increasing profits. But at the same time, the risk of deterioration of the material condition of the enterprise under unfavorable circumstances is reduced.
Standard values of the financial independence coefficient from different economists are given in the table:
Author Variant name of the coefficient Numerical value
Dontsova L.V. Financial independence ratio 0.4-0.6
Dolgikh Yu.A. Financial independence ratio >=0.5
Tupikova O.A. Financial independence ratio 0.5-0.8
Average statistical indicators of the coefficient by years for organizations of the Russian Federation*
Table Average statistical british student data package indicators of the coefficient by years
* The table values are calculated based on data from Rosstat and the Federal Tax Service (GIR BO)
Analysis of the financial independence ratio
The optimal coefficient of overall financial independence found as a result of calculations does not yet allow us to draw full and objective conclusions. We still do not know anything about the company's ability to meet short-term obligations. If their level is unreasonably high, then the enterprise may not be able to pay current bills.
Further analysis requires the introduction of additional relationships that also describe the structure of sources of finance and assets, but at the same time take into account the speed of their circulation and the timing of the fulfillment of obligations.
The first group of such indicators are liquidity ratios. As a rule, the quick liquidity ratio is used, as it is more appropriate:
Quick ratio = (Current accounts receivable + Liquid inventory and finished goods + Cash and cash equivalents) / Current liabilities.
This ratio is also called the coverage ratio. It shows the company's ability to pay off short-term liabilities using only highly liquid assets. If this ratio is less than one, it is a signal that the company may become insolvent.
The optimal value is considered to be between 1.5 and 2.5. Higher figures may indicate an irrational financial structure, as well as indicate the possibility of attracting external funds to increase the profitability of one's own resources.
Analysis of the financial independence ratio
Source: shutterstock.com
It is important that when determining the quick liquidity ratio, the numerator does not include materials, raw materials and expenses in unfinished production. Normally, they are not sold, and their transfer directly to finance leads to a disruption of the production process, resulting in losses.
Another additional indicator is the ratio of own working capital (or maneuverability):
Equity Maneuverability Ratio = (Equity – Non-Current Assets) / Equity
If the KFN is close to 1, this indicates that the development of the enterprise is slow. Without attracting borrowed funds, it deprives itself of additional finances for the growth of assets, which would allow increasing profits. But at the same time, the risk of deterioration of the material condition of the enterprise under unfavorable circumstances is reduced.
Standard values of the financial independence coefficient from different economists are given in the table:
Author Variant name of the coefficient Numerical value
Dontsova L.V. Financial independence ratio 0.4-0.6
Dolgikh Yu.A. Financial independence ratio >=0.5
Tupikova O.A. Financial independence ratio 0.5-0.8
Average statistical indicators of the coefficient by years for organizations of the Russian Federation*
Table Average statistical british student data package indicators of the coefficient by years
* The table values are calculated based on data from Rosstat and the Federal Tax Service (GIR BO)
Analysis of the financial independence ratio
The optimal coefficient of overall financial independence found as a result of calculations does not yet allow us to draw full and objective conclusions. We still do not know anything about the company's ability to meet short-term obligations. If their level is unreasonably high, then the enterprise may not be able to pay current bills.
Further analysis requires the introduction of additional relationships that also describe the structure of sources of finance and assets, but at the same time take into account the speed of their circulation and the timing of the fulfillment of obligations.
The first group of such indicators are liquidity ratios. As a rule, the quick liquidity ratio is used, as it is more appropriate:
Quick ratio = (Current accounts receivable + Liquid inventory and finished goods + Cash and cash equivalents) / Current liabilities.
This ratio is also called the coverage ratio. It shows the company's ability to pay off short-term liabilities using only highly liquid assets. If this ratio is less than one, it is a signal that the company may become insolvent.
The optimal value is considered to be between 1.5 and 2.5. Higher figures may indicate an irrational financial structure, as well as indicate the possibility of attracting external funds to increase the profitability of one's own resources.
Analysis of the financial independence ratio
Source: shutterstock.com
It is important that when determining the quick liquidity ratio, the numerator does not include materials, raw materials and expenses in unfinished production. Normally, they are not sold, and their transfer directly to finance leads to a disruption of the production process, resulting in losses.
Another additional indicator is the ratio of own working capital (or maneuverability):
Equity Maneuverability Ratio = (Equity – Non-Current Assets) / Equity