CAPITAL STRUCTURE & VIABILITY RATIOS
1. CAPITAL RELATIONSHIP (Autonomy)
Equity / total Capital
It is calculated by dividing the total (not the average) equity of the business by its total liabilities or total assets in the balance sheet.
It expresses the relationship between equity and the total capital available to the business. It takes values from 0 to 100. Values approaching 100 are preferable. A high ratio does not bode ill for liquidity in the coming years, since the pressure for cash outflows to service external funds will be low and manageable. This ratio also gives a picture of the autonomy a business can have and of its independence from borrowed funds and other creditors.
2. OVER-INDEBTEDNESS (Debt to Equity)
Debt / Equity (%)
It is calculated by dividing total liabilities (long-term + short-term) by total equity.
It shows the relationship between the equity and the debt of the business. The higher the ratio (and above 100), the more over-indebted the business. It is used by the lenders of the business to assess the degree of security that equity gives them, and also by the management and shareholders of the business to see the level that the use of financial leverage has reached.
3. FINANCING OF FIXED ASSETS
Equity / Net value of fixed assets (%)
It is calculated by dividing equity by the net value of fixed assets.
This ratio measures the relationship between operating non-current assets and equity. It is used to determine how the fixed assets of the business are financed. A rising trend in the value of the ratio shows that the expansion of the capital equipment of the business has been financed more from equity than from borrowed funds.
4. CURRENT ASSETS TO LIABILITIES
Current Assets / Total Liabilities
It is calculated by dividing total current assets by total liabilities, including the Prepayment and Accrual accounts of Assets and Liabilities.
This ratio shows the relationship between current assets and total liabilities. It is an indication of the long-term liquidity of the business. Values >1 mean that current assets more than cover the total liabilities of the business.
5. DEBT BURDEN
Loan Liabilities / Total Assets (%)
It is calculated by dividing the total loans of the business, as shown in the balance sheet, by total assets.
This ratio shows the relationship between loans and the total capital of every form used in any way by the business. It is used to assess the debt burden of the business.
6. FIXED ASSETS TO LONG-TERM LIABILITIES
Net value of fixed assets / Long-term Liabilities
It is calculated by dividing net fixed assets by long-term liabilities.
It shows the relationship between fixed assets and long-term liabilities. To some extent it reveals the security of the long-term creditors of the business from the liquidation of fixed assets. It also shows to what degree the business can raise additional external funds with the same security. Values >1 are preferable both for the owners of the business, showing that they can obtain additional external funds, and for long-term creditors, showing that their funds are adequately secured.
7. AGE OF FIXED ASSETS
Total Depreciation of Fixed Assets in the Balance Sheet / Acquisition Cost of Fixed Assets
It is calculated by dividing the net value of fixed assets by total liabilities.
This ratio shows the relationship between fixed assets and total liabilities or assets and the degree to which funds have been invested in fixed assets, compared with short-term assets.
8. AGE OF FIXED ASSETS
Total Depreciation of Fixed Assets in the Balance Sheet / Acquisition Cost of Fixed Assets
It is calculated by dividing the total depreciation in the balance sheet by the acquisition cost of the fixed assets in the balance sheet.
This ratio shows the relationship between fixed assets at acquisition cost and the depreciation charged on them. It is used to assess the age of fixed assets with a view to their possible replacement.
9. SELF-FINANCING
Reserves / Share Capital
It is calculated by dividing total reserves (of the equity account) by total share capital.
It shows the relationship between reserves and share capital. It is used to diagnose the creditworthiness of the business and the policy of management or the owners regarding their long-term investment intentions.
10. CAPITAL INTENSITY
Annual Depreciation / Annual Labour Cost
It is calculated by dividing the annual depreciation of fixed assets by the annual labour cost of the business.
It shows the degree of automation of production in industrial businesses and is used to assess how a business operates and how competitive it is.
11. INTEREST COVERAGE
Profit before interest & Tax / Interest
It is calculated by dividing profit before interest and tax by annual interest
This ratio measures the degree to which the profits of the business can fall without causing any problem in meeting the annual interest charge.
12. RENEWAL OF FIXED EQUIPMENT
Depreciation for the period / Average change in Fixed Assets for the period before depreciation
It is calculated by dividing the total depreciation for the year by the change in fixed assets in the same period.
This ratio shows the percentage of new investments financed from depreciation.
13. COVERAGE OF FINANCIAL EXPENSES
Profit before interest & Tax / Annual financial Expenses
It is calculated by dividing profit before interest and tax by annual financial expenses.
It shows the ability of the business to generate enough income to pay, apart from all the other expenses it needs to operate, its financial expenses as well.
14. RETURN ON TOTAL CAPITAL EMPLOYED
(Profit before tax + financial expenses) / Total Liabilities
It is calculated by dividing profit before tax and financial expenses by total liabilities.
It shows the profitability of the business regardless of the sources of its funds. It also shows the ability of management to generate profits through the proper use of equity and external funds. Calculating the return on total capital employed is in a way a guide in cases where a business is about to acquire another business or take on new activities. If this ratio is lower than the cost of borrowed funds, any increase in them will reduce the profits of the business. A low ratio can also easily fall to zero in periods of crisis for the business.
15. RETURN ON EQUITY
Net results before tax / Equity (%)
It is calculated by dividing net profit before tax by total equity.
This ratio shows the earning capacity of a business and tells us whether the goal of a satisfactory result was achieved. A high ratio indicates that the business is doing well, which may be due to successful management, to favourable economic conditions or to the proper use of its funds. In this last case shareholders benefit, because external funds cost less than they yield to the business.
16. FINANCIAL LEVERAGE MARGIN
Return on Equity / Return on Capital Employed (%)
It is calculated by dividing the rate of return on equity by the rate of return % on total capital.
This ratio shows the relationship between the return on equity and the return on the total capital invested in the business. Financial leverage is the use of borrowed funds in order to increase the return on equity. The effect of borrowed funds on the profits of a business is positive when the return on equity is greater than the return on total capital employed. If the ratio is > 1, the effect of using external funds on the profits of the business is beneficial for the business. If the ratio is < 1, the effect of using external funds on the profits of the business is negative and the business is borrowing on onerous terms. If the ratio is = 1, the effect of using external funds on the profits of the business is nil and there is no benefit for the business.
17. INVESTMENT PAYBACK PERIOD
Net fixed assets / Cash flow
It is calculated by dividing the net value of fixed assets by cash flow.
This ratio shows the length of time over which the total investment of a business in fixed assets will be released in the form of profits and depreciation. The higher this ratio, the more time is needed for the fixed assets to be paid off with inflows from the activity of the business alone.
18. SELF-FINANCING PERCENTAGE
Cash flow / Sales (%)
It is calculated by dividing cash flow by annual sales, as a %.
This ratio shows the percentage % of self-financing of a business. The higher this ratio, the greater the share of the business’s financing that comes from its own funds.
19. EQUITY TO DEBT
Equity / Debt
It is calculated by dividing equity by borrowed funds (long-term + short-term liabilities).
This ratio shows the security the business offers its lenders. If the ratio is > 1, the owners of the business contribute more capital than its creditors. The higher this ratio, the greater the security given to the creditors of the business.
20. LONG-TERM BORROWING TO EQUITY
Long-term liabilities / Equity %
It is calculated by dividing long-term liabilities by equity.
This ratio shows the % relationship between the long-term liabilities of the business and its equity.
The Company Specisoft S.A.
Specisoft S.A. was founded in 1987 as a specialised software development company, its main characteristic being the development of software on subjects involving knowledge, high specialisation, special optimisation algorithms and very large-scale data processing.
The subjects of the programs (among others) concern a) Business software (Business Planning – Business Plan, Financial Analyses of Balance Sheets, Business Valuation, Standard Costing, Forecasts, Investment Appraisals etc.), b) Financial software (Fundamental Analysis, Portfolio Selection etc.), c) Business Games (Business Simulators), d) Optimisation of Economic Problems, e) Educational software on the above subjects.
The programs run on WINDOWS locally, on a network and over the INTERNET.
Almost all the company’s employees are university graduates. In addition, the company employs specialised, highly experienced external associates holding postgraduate degrees (Master’s and PhD) and has university professors as advisers.
The company’s customers are Businesses, Business Consultants, Accounting firms, Public Organisations, Municipalities etc. Among its customers (the company has more than one thousand seven hundred) are many of the largest Greek companies, more than eighty-five of them listed on the Athens Stock Exchange.
A very important part of the company’s customer base is the Greek higher-education Institutions (universities and technological institutes), Vocational education (Public and Private vocational institutes), Colleges, Seminar Organisations, Vocational Training Centres etc., which equip their laboratories with the company’s programs, used directly in the training of their students.
Specisoft, with its software technology, its specialised optimisation algorithms and the knowledge of specialist financial subjects that it embodies in the software it produces, can be described as a knowledge company within the emerging knowledge economy.
Specisoft S.A.
17 Pergialitou St., 15451 Neo Psychiko
Tel: +30 210-6911468, Fax: +30 210-6993791
e-mail: info@specisoft.gr, SITE: www.specisoft.gr