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Enhancing the analytical potential of cash flow-based solvency ratio analysis

Laskina L.Yu. ITMO University, St. Petersburg, Russian Federation ( )

Journal: Economic Analysis: Theory and Practice, #11, 2017

Importance The article investigates cash-flow based ratios, namely the cash flow ratio and cash interest coverage ratio (CICR), and their applicability to provide a more complete and accurate description of company solvency and financial stability.
Objectives The aim is to explore the role of cash flows as an additional source of information in managing the company solvency.
Methods The study rests on financial statements of twelve Russian companies providing airport services. I compared the cash flow ratio and the cash interest coverage ratio with 'traditional' ratios, like current ratio and interest coverage ratio (ICR) respectively. The correlation analysis revealed relationships between the said pairs of ratios.
Results The study shows that the relationship between the current ratio and the cash flow ratio is weak. It is more informative and reliable for both internal users and potential investors and lenders to use a 'cash-based' ratio from the other pair of ratios, namely, cash interest coverage ratio and interest coverage ratio. Due to their high correlation, CICR can be used more extensively in the analysis of financial condition.
Conclusions The use of CICR in addition to ICR will not only provide a better understanding of company's financial stability, but can also be considered to update its credit rating; the CICR-based credit rating will be more reasonable and reliable.

The use of financial leverage to estimate synthetic credit rating of the entity

Laskina L.Yu. Saint Petersburg National Research University of Information Technologies, Mechanics and Optics, St. Petersburg, Russian Federation ( )

Kal'varskii G.V. Saint Petersburg State University, St. Petersburg, Russian Federation ( )

Journal: Financial Analytics: Science and Experience, #13, 2016

Importance The article investigates financial leverage and its measurement methods. When this indicator goes up, financial risks increase. Higher financial difficulties affect the entity's credit rating directly.
Objectives The research analyzes how financial leverage influences synthetic credit rating of the entity.
Methods When devising our own method, we applied the synthetic credit risk scheme, which was based on a correlation between credit ratings and key financial ratios (interest coverage ratio, net debt ratio), and the relation between the corporate rating and yield and redemption of corporate bonds.
Results After we identified the inverse relation between financial leverage and interest coverage ratio, we evaluated the effect of financial leverage on the corporate credit rating, which was estimated through synthetic credit rating assessment. Studying the entities operating in the automotive and oil sectors, we analyzed credit ratings assigned by the leading rating agencies and estimated with the updated synthetic credit rating. Entities in the automotive sector were found to have higher ratings than updated synthetic ones. However, oil companies demonstrate an opposite trend.
Conclusions Updated synthetic credit rating, including financial leverage, is more flexible reflection of changes in financial position relating to internal and external risks of the entity.

Operational, financial and tax leverages: interpretation and interrelation

Vlasova M.S. International Banking Institute, St. Petersburg, Russian Federation ( )

Laskina L.Yu. Institute of Refrigeration and Biotechnology, St. Petersburg National Research University of Information Technologies, Mechanics and Optics, St. Petersburg, Russian Federation ( )

Journal: Financial Analytics: Science and Experience, #40, 2014

Importance The world financial and economic crisis, which has been developing since 2008, and which recently became acutely evident, changed not only the relationships between the economic subjects, but also caused the social, economic and institutional problems deterioration, and lead to the suspension of the earmarked investment to expand production. As a consequence, the development of methods and models, which not only take into account the manufacturing, financial and tax risks, but also enable to counter-balance them, is an essential condition of the entrepreneurship development in Russia; so the article's subject presents scientific and practical interests.
     Objectives The purpose of the study is to develop the methods to assess the tax leverage and identify its analogues with the established types of leverage - operational and financial ones. The different types of leverage serve as the subjects of the research.
     Methods In order to assess the operational, financial and taxation risk, we propose to use the operational, financial and tax leverages, respectively. We provide their comparison in terms of the interpretation of cover costs through the different income ratio, and fixed costs and profit ratio.
     Results We have identified that the analogy between all kinds of leverage when using the different techniques of their appraisal led to the comparable results, i.e. all kinds of leverages have declined, and that proves the increased enterprise sustainability.
     Conclusions and Relevance We emphasize that the practical value of the paper lies in the fact that all forms of the leverages are linked with enterprise sustainability, and it allows defining of the acceptable risk level.

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