Theme 12. Access and analysis of economical bankruptcy of enterprises

Theme 12. Access and analysis of economical bankruptcy of enterprises
1. Tasks, purpose and objective necessity of assess and analyze of economical bankruptcy of entity.

2. The Bankruptcy institute and its developing prospects. Legislative norms of streamline of economical bankruptcy.

3. Information sources of bankruptcy analysis.

4. System of indicators is used to determine bankruptcy and their analysis.

5. Financial state analysis to determine threats of economical bankruptcy and various models for determine of economical bankruptcy.

6. Convention of bankruptcy: surveillance, external management, sanitation, specifics of liquidation.

Task 12.1. Complete the table 12.1 with your own opinion.

Table 12.1

Terms	Explanations (briefly)
Bankruptcy
Insolvent
Bankruptcy institute
Legislative norms of Bankruptcy
Convention of bankruptcy
Bankruptcy analysis
Information sources of bankruptcy analysis

Task 12.2. Calculate the 4^th column and make your assess the state of each performance of each tabels.

Table 12.2

Indicators system connected with economical and financial potential are used to assess economical bankruptcy

Title of performance	Calculation way	Content	Crib
1	2	3	4
Indicators related to sources of own assets
Concentration of own assets (Coa)	Coa=Oa / TB	Expresses concentration state of the own assets (Oa) in total sum of the balance sheet (TB)	480 / 780
Financial dependence(Fd)	Fd= TB / Oa	Total sum of the balance sheet (TB) to own assets (Oa).	780 / 480
Own assets mobility (Moa)	Moa = WC / Oa	Working capital (WC) to sources of own assets (Oa)	(390 - 600) / 480
General mobility coefficient(Gmc)	(Gmc) = WC/TB	Share of working capital (WC) in total sum of the balance sheet (TB)	(390 - 600) / 780
Activity ratio of Net assets (Кф)	Кф=NA/TA	Share of net assets (NA) in total assets (TA)	(400 - 480) / 480

Table 12.3

Title of performance	Calculation way	Content	Crib
1	2	3	4
Indicators related to debt capital
Concentration of debt capital (Cdc)	Cdc=Dc / TB	Expresses concentration state of the debt capital (Cdc) in total sum of the balance sheet (TB)	570+580+730+740 / 780
Concentration (Cltd) long term debt capital in own assets	Cltdcoa= Ltdc / Oa	Express provision state (Cltdoa) own assets with long term debt capital	570+580 / 480
Concentration long term debt capital in total debt capital (Cltdctdc)	Cltdctdc= Ltdc / Tdc	Share of long term debt capital in total debt capital	570+580 / 570+580+730+740
Dependence own assets to debt capital (Doadc)	Doadc= Tdc / Oa	Express debt capital per one som own assets	570+580+730+740 / 480

Table 12.4.

Title of performance	Calculation way	Content	Crib
1	2	3	4
Indicators related to long term assets
Fixed assets to total assets (Cfata)	Cfata =Fa / TB	Express share of fixed assets in total assets (Total Balance)	012 / 400
Accumulation ratio of fixed assets (Intangible or common) (Кавжу)	Кавжу= FAtd / FA	It expressed how many part of fixed assets were accumulated	011 / 010
Intenseness ratio of fixed assets accumulation (Кавижу)	Кавижу= FAcd / FA	It expressed how many part of fixed assets were accumulated	(011 end – 011 beginning) / 010

Table 12.5.

Title of performance	Calculation way	Content	Crib
1	2	3	4
Indicators related to current assets
Provision ratio (Камт) of current assets (CA) with own circulating assets (OCA)	Камт = (OCA) / (CA)	How many OCA to per som of CA	(480+570+580) / 390
Dependence ratio of current assets to attracted loans (Кчжк)	Кчжк= Ltl +Shtl / CA	How many attracted loans to per som of CA Ltl – long term loan; Shtl – short term loan	570+580+730+740 / 390
Dependence ratio (Кбк)of current assets to short term bank credits (Shtbc) loans	Кбк= (Shtbc) / CA	How many short term bank credits to per som of CA	730 / 390
Provision ratio (Кxмт) of current assets (CA) with quick liquidity assets (Cash)	Кхмт= Cash / CA	How many Cash means to per som of CA	320 / 390
Share (Камх) of current assets (CA) in total properties of entity (TP)	Камх = CA / TP	Share (Камх) of current assets (CA) in total properties of entity (TP)	390 / 400

Task 12.3. Calculate the table 12.7 (below) and assess the results of each ratio by using standards of boundary and signs of bankruptcy in table 12.6.

Table 12.6

Key performances for assessing economic bankruptcy of entities and their norms levels

Performances	Determination order	Standards or boundary	Signs of bankruptcy
1	2	3	4
Pay ability	Current assets / Liabilities in mature	2-3	C<2
Independence	Equity to total property	C >50%	C <50%
Source of Inventory	(Working capital – Inventory) / Working capital	Positive	Negative
Equity to liabilities	Equity to liabilities	Excess	Shortage
Profitability (Assets, Capital, liabilities)	Net income / assets, Capital, Liabilities	C>0	C < 0
Usage production capacity	Volume of product in factual production capacity / volume of product in projected production capacity	C=1 >0,5	C=1< 0,5
Cumulate of amortization of FA and IA	Amortized cost of FA and IA / Primary value of FA and IA	C>0.5	C<0.5
Overdue liabilities	Overdue liabilities / Total liabilities	C<0.5	C>0.5

Table 12.7

Performances	Determination order	At the beginning of the year	At the ending of the year	Differences (+;-)
1	2	3	4
Pay ability	Current assets (390) / Liabilities in mature (601)
Independence	Equity (480) to total property (400)
Source of Inventory	(Working capital (390-600) – Inventory(140)) / Working capital (390-600)
Equity to liabilities	Equity (480) to liabilities (770)
Profitability (Assets, Capital, liabilities)	Net income (270) / Assets (400) or Capital (480) or Liabilities (770)
Usage production capacity	Volume of product in factual production capacity / volume of product in projected production capacity
Cumulate of amortization of FA and IA	Amortized value of FA and IA (011+021) / Primary value of FA and IA (010 +020)
Overdue liabilities	Overdue liabilities (492+550+602+650) / Total liabilities (770)

Task 12.4. Calculate the table 12.9 (below) and assess the results of each ratio by using standards in table 12.8. Determine the state of entity.

Table 12.8

Monitoring of financial economic state of entities and criteria of analysis

Performances	Formulas	Unstable state of economy
Key performance
Pay ability	Current assets / Current liabilities	C<1.25
Provision of own circulating assets	(Equity +Long term credit and loans – Long term assets) / Current assets	Less than 0.2
Profitability of assets (Ra) and costs (Rc)	Ra= (Profit before tax / Average value of assets)*100 Rc= (Profit before tax / Cost)*100	If below than 0
Additional performances
Financial independence	Equity / Total liabilities – Long term liabilities	Less than 1.25
Usage production capacity	Volume of product in factual production capacity / Volume of product in projected production capacity - (Leasing - Conservation)	Less than 0.5
Depreciation of FA	Depreciation / Primary value of FA	More than 0.5

Information: Recommended the performances system to assess economical state of entities according to the resolution “On criteria of monitoring and analysis of financial economical state of entities” that issued by the Committee on affaires of Economical insolvency entities under the ministry of Economy of the Republic of Uzbekistan.

Table 12.9

Performances	Determination order	At the beginning of the year	At the ending of the year	Differences (+;-)
Key performance
Pay ability	Current assets (390) / Liabilities in mature (601)
Independence	Equity (480) to total property (400)
Source of Inventory	(Working capital (390-600) – Inventory(140)) / Working capital (390-600)
Additional performances
Profitability (Assets, Capital, liabilities)	Net income (270) / Assets (400) or Capital (480) or Liabilities (770)
Usage production capacity	Volume of product in factual production capacity / volume of product in projected production capacity
Cumulate of amortization of FA and IA	Amortized value of FA and IA (011+021) / Primary value of FA and IA (010 +020)

Task 12.4. Predict the failure of entity by using The Two Factors model of the Altman (For manufacturing firms)
The Two Factors model of the Altman: Z = -0.3877 -1.0736*X₁ + 0.0579*X₂
Table 12.10

Indicators and orders of calculation

Sign of factors	Factors	Calculation order
X1	Current Pay ability	Current assets (390) / Current liabilities (600)
Х2	Capitalization	Book value of Total loans (570+580+730+740) / Value of Equity(480)

Z<0 – probability of insolvency less than 50%;

Z>0 – probability of insolvency more than 50%;

Z=0 – probability of insolvency equal to 50%.

Task 12.5. Predict the failure of entity by using The Five Factors model of the Altman ((For manufacturing companies which listed in exchanges)
The Five Factors model of the Altman: Z = 1.2 X₁ + 1.4 X₂ + 3.3 X₃ + 0.6 X₄ + 1 X₅
Table 12.11

Indicators and orders of calculation

Sign of factors	Factors	Calculation order
X1	Share of own circulating assets in total assets	(Working Capital (390-600)) / Total Assets (400)
Х2	Profitability of assets	Retained Earnings (450) / Total Assets (400)
Х3	Operational profitability	EBIT(100) / Total Assets(400)
Х4	Market premium on equity	Market value of Equity (480) / Book value of Total Liabilities (770)
Х5	Assets efficiency	Sales (010) / Total Assets(400)

Z > 2.9 - financial stability zone (green zone);

1.8< Z < 2.9=0 – ambiguity zone (gray zone);

Z<1.8 – bankrupt zone (red zone).

Task 12.5. Predict the failure of entity by using The Four Factors model of the Altman ((For a broader range of firms)
The Four Factors model of the Altman: Z = 6.56 X₁ + 3.26 X₂ + 6.72 X₃ + 1.05 X₄
Table 12.12

Indicators and orders of calculation

Sign of factors	Factors	Calculation order
X1	Share of own circulating assets in total assets	(Working Capital (390-600)) / Total Assets (400)
Х2	Profitability of assets	Retained Earnings (450) / Total Assets (400)
Х3	Operational profitability	EBIT(100) / Total Assets(400)
Х4	Market premium on equity	Book value of Equity (480) / Book value of debt (570+580+730+740)

Under this model the Z – score cutoffs are:

Z > 2.6 healthy;

1.1< Z < 2.6=0 gray area;

Z<1.1 bankrupt zone.

Task 12.6. Predict the failure of entity by using The Biver model

Table 12.13

Biver model

Title	Formula	Criteria
Biver ratio	(Net income + Amortization) / Debt capital	C > 0,35 – normal; 0,17 < C. < 0,3 – unstable; 0,15 < C. < 0,16 – crisis.
Pay ability	Current assets / Current liabilities	C  > 2 - normal; 1 < C < 2 - unstable; C < 1 – crisis.
Profitability of assets	(Net income / Total balance)*100%	6-8% and more - normal; 2-5% - unstable; From (-22%) till 1 – crisis
Financial leverage	(Debt capital / Total balance)*100%	C < 35% - normal; 40% < C < 60% - unstable; C > 80% - crisis.
Provision of own assets with working capital	(Equity – long term assets) / Total balance	C > 0,4 - normal; 0,3 < C < 0,1- unstable; C < 0.1 – crisis.