Slow-moving assets: solvency analysis methodology

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

In the process of analyzing the financial and economic performance of an enterprise, financiers can pay great attention to the slowly realizing assets of the company. With what it can be connected? You will find the answer to this question in the article.

What are slow-moving assets defined for?

What are these enterprise assets?

Assets - slowly sold or any other - are determined in most cases as part of the analysis of the economic activity of the enterprise. The main source of financial data in the case of solving relevant problems is the balance sheet of the enterprise. It is formed on the basis of the actual economic indicators of the company, approved by its management and considered as a key element of financial statements.

Any current assets that are slowly being sold, including, are analyzed, in particular, in order to adequately assess the creditworthiness of the business by interested parties - primarily the owners of the enterprise. The structure of a firm's assets affects its ability to deliver on time.incurred liabilities, including loan repayments.

Let's consider the importance of slow-moving assets in evaluating the effectiveness of an enterprise's business model. The following classification of the corresponding type of organization resources will help us to study their specifics.

Classification of enterprise assets

In the environment of modern financiers, an approach is common in which assets are classified into the following main categories:

• the most liquid (the so-called Group A1 assets);
• promptly implemented (A2);
• slowly realizable assets (A3);
• hard-to-sell assets.

Let's consider their specifics, as well as the differences between them in more detail.

What are the assets of group A1?

It is customary to refer to the relevant assets the funds at the disposal of the enterprise, as well as short-term investments. Both types of considered assets are reflected in separate lines of the balance sheet.

The assignment of these assets to the most sold is quite understandable: the company's funds can be spent at any time in order to purchase something or pay dividends to business owners. They are characterized by absolute liquidity. In turn, short-term investments are assets that a company can sell at almost any time to other business entities, and in some cases to individuals. Therefore, they can also be legitimatelyattributed to the most salable resources.

Peculiarities of A2 group assets

The next group of assets are those classified as operationally realizable. These traditionally include accounts receivable of the organization, which must be repaid within 12 months from the date of formation of the balance sheet or other source that is used in the analysis of assets.

These resources are sufficiently highly liquid, however, how quickly they can be realized depends primarily on the terms of the contracts under which receivables arise, the conditions for the exchange of financial transactions between the parties to the transaction, and the solvency of the obligated party.

Assets of A3 group

The next category of resources is just the same slow-moving assets, or those that belong to group A3. These traditionally include inventories, as well as VAT, which is refundable from the state.

The actual liquidity of the considered assets depends, first of all, on the dynamics of consumer demand for products manufactured by the enterprise. At the same time, its structure may contain both very slowly sold assets, and those that are represented by goods characterized by extremely high demand, therefore, objectively subject to attribution to a higher level of liquidity - if not A1, but quite possibly A2.

Thus, it makes sense to classify the considered type of assets according to additionalgrounds, and this will only increase the overall efficiency of the analysis of the economic indicators of the enterprise.

Group A3 assets as current assets: what are their specifics?

It can be noted that the 3 categories of assets considered by us are traditionally classified as current. They are characterized by a common feature - the ability to change their structure within certain production cycles.

How quickly current assets will be sold is largely determined by the effectiveness of the marketing strategy for the development of the enterprise. It happens that assets that are slowly sold within one reporting period change their demand on the market rather abruptly. Such patterns can be cyclical - for example, if we are talking about seasonal goods or those that, in terms of determining the selling price, are highly dependent on fluctuations in the exchange rate of the national currency.

Assets of A4 group

Another group of assets that can be analyzed as part of an assessment of the effectiveness of an enterprise's economic development model is those that are difficult to implement. These most often include non-current assets, as well as receivables that must be paid by the obligated party in more than 12 months from the date of the analysis of the business performance of the enterprise. Non-current assets include fixed assets and other resources that are acquired by the company to organize the production process.

Actually, the need to implementthe assets in question usually arise from the liquidation or reorganization of an enterprise in the course of a merger or acquisition.

So, we have studied what resources of type A3 are - slow-moving assets, other values, classified using criteria common among modern financiers. It will also be useful to consider how the relevant assets can be used as part of the analysis of the economic activities of the enterprise in practice.

Assets in the analysis of economic indicators: nuances

Consideration of assets in the context of the analysis of indicators of economic activity of the organization can be carried out only if they are compared with indicators characterizing the value of certain liabilities of the company. They can also be classified according to different criteria. So, there are liabilities:

• the most urgent (P1 liabilities);
• short-term (L2);
• long-term (L3);
• permanent (P4).

The first are those obligations that it is desirable to repay within 3 months. To the second - liabilities that need to be compensated within a period of 3 months to 1 year. Long-term liabilities assume repayment over a period that exceeds 1 year. Permanent liabilities are, in particular, the authorized capital of the enterprise, retained earnings, income for future periods.

How are slow-moving and other assets analyzed when compared with the value of liabilities? Let's study this issue in more detail.

Assets and liabilities inbalance analysis: nuances

A common approach among financiers is that an organization's balance sheet is considered fully liquid if:

• Assets of type A1 are greater than or equal to liabilities of type P1;
• resources of type A2, in turn, meet or exceed the obligations of P2;
• there is no excess of slow-moving assets by long-term liabilities;
• hard-to-sell assets are less than or equal to permanent liabilities.

If the indicated ratios are met, the investor or any other interested person, such as a creditor, can highly appreciate the efficiency of the enterprise.

It can be noted that if at least the first 3 ratios are met, the 4th one will also be fulfilled, and this will mean that the enterprise has a sufficient amount of working capital to obtain a very high financial stability. In turn, if the first 3 ratios are not observed during the financial analysis of asset and liability indicators, this may indicate that the company management model is not very effective, and its balance sheet is characterized by low liquidity.

At the same time, the fact that, for example, slow-moving assets are quite consistent with the balance sheet may not necessarily mean that the company has enough other resources. As a rule, during the production process, one type of asset does not replace another, unless, of course, we are talking about the cost compensation of resources.

The ratio of assets and liabilities: the nuances

There are other formulas for evaluating the effectiveness of an enterprise's production model.

So, it can be characterized as highly effective if the sum of liabilities of P1 and P2 is less than the assets of A1. In turn, the solvency of the enterprise can be assessed as corresponding to a high level if the sum of liabilities P1 and P2 is less than the sum of assets A1 and A2.

However, if the situation is the other way around, that is, the amount formed by adding indicators P1 and P2 is greater than that obtained by adding A1 and A2, but less than the sum of indicators A1, A2 and A3, solvency can be characterized as acceptable under normal market conditions. In the event of a crisis, the firm may already have some problems with servicing obligations.

In turn, if the sum of indicators A1, A2 and A3 is less than the one that is formed as a result of the addition of liabilities P1 and P2, then the business development model can be assessed as inefficient, based on the fact that the company is highly likely to will experience difficulties in servicing debts at the expense of assets.

CV

So, we have considered what are the principles for classifying the assets of an enterprise, as well as what is the meaning of their analysis. Slow-moving assets mainly include the company's inventories, deductible VAT and other resources characterized by similar turnover rates. However, it makes sense to carry out additionalclassification of the corresponding type of assets for the reason that their liquidity can vary significantly, based on the characteristics of demand for a particular product. And it may depend, for example, on the seasonal factor.

When analyzing the effectiveness of the production model of an enterprise, resources of the A1, A2 type and other current assets, slowly sold among them, it makes sense to consider in the context of comparison with the size of the company's liabilities. In the general case, the excess of the former over the latter will be welcome. However, if this is the case, then it is assumed that hard-to-sell assets of type A4 will be less than permanent liabilities - those classified as P4 liabilities.