Digest Finance
 

Expanding Analytical Capabilities of the Ratio Analysis of Entities' Solvency Through Cash Flows

Vol. 23, Iss. 1, MARCH 2018

PDF  Article PDF Version

Received: 6 July 2017

Received in revised form: 19 September 2017

Accepted: 23 October 2017

Available online: 30 March 2018

Subject Heading: RISK, ANALYSIS AND EVALUATION

JEL Classification: G39, L25, L93

Pages: 16–28

https://doi.org/10.24891/df.23.1.16

Laskina L.Yu. ITMO University, St. Petersburg, Russian Federation
risk05@mail.ru

ORCID id: not available

Importance The article studies ratios assessed through cash flows, i.e. cash flow ratio and interest coverage ratio, and their application to capture a more reliable and comprehensive view of the entity's solvency and financial sustainability.
Objectives The research examines cash flows of the entity as an additional source of information to manage corporate solvency.
Methods The research is based on financial statements of airport operators for the period spanning from 2011 until 2014. I also compare the cash flow coverage ratio and cash interest coverage ratio with traditional ratios, such as current ratio and interest coverage ratio respectively. Conducting a correlation analysis, I trace the nexus between the above pairs of ratios.
Results As the research proves, the current ratio and cash flow coverage ratio do not correlate strongly. Users should better use respective cash flow ratios to get more full and accurate information. Relying on their strong correlation, the cash interest coverage ratio can be applied to a greater extent to analyze the financial standing of entities.
Conclusions and Relevance As I conclude, if supplemented with the cash interest coverage ratio, the interest coverage ratio can not only provide a broader and deeper view of the entity's financial standing, but also be used to specify the credit rating of the entity. It will be more adequate and accurate to assign a credit rating on the basis of the cash interest coverage ratio since it allows for cash flow.

Keywords: solvency, current ratio, cash flow coverage ratio, credit rating

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