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Synthetic ratio of financial stability

Method of calculation

Formula for synthetic ratio of financial stablility: capital structure ratio / assets structure ratio

or

Formula for synthetic ratio of financial stablility: long-term solvency ratio based on equity coverage / long-term solvency ratio based on debt coverage

(The above formulae are equivalent – they have to give the same result)

Ratio's description

Synthetic ratio of financial stablility constitutes the summary of the assessment of company's general performance from the point of view of assets and capital relationships. There are no reference values for this ratio, although the trends of changes can be observed. While interpreting these changes it is important to determine which partial ratio caused the increase or decrease of the synthetic ratio. It will allow to  explain preliminarily the reasons for the deterioration or improvement of the general performance, and later to perform a more detailed analysis in this area.

Ratio's interpretation

  • When assessing the changes in ratio's value over time (over few periods):
    • the increase of ratio's value is interpreted as an improvement of the company's general performance, resulting from the improvement in matching of the structure of capitals and assets,

       

    • the decrease of ratio's value is interpreted as a deterioration of the company's general performance, resulting from the deterioration in matching of the structure of capitals and assets.

       

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