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With the transition to a market economy, analysis of financial and economic activities of enterprises is becoming of greater significance. In a highly competitive business environment with the desire to maximize profits, the analysis of financial and economic activity has become an integral function of management. This aspect of company’s management is the most important at the present time, as the realities of the market conditions show that the company cannot function effectively without the analysis of its financial and economic activities. In developed countries, ratio analysis is the norm of business since a long time (Vandyk, 2006).
Financial ratios are relative indexes. They may be calculated as ratios of individual items of financial statements, or combinations thereof. Analysis of the financial ratios aims to study their dynamics in a certain firm and make inter-firm comparisons (Miller, 2010). Financial ratios allow analyse the same inherent flaws as in the trend analysis. Conversely, the use of the coefficients is still appropriate, since this is not the analysis of the absolute values of the financial statements, and the relations of its individual articles can neutralize some specified earlier risks of an erroneous trend. Inter-firm comparisons should be treated with sufficient caution because of differences in accounting policies and should consider the specifics of the companies, and this information is hard to access.
Traditional solvency ratio is the core of financial condition analysis. Solvency in a general sense means the ability to perform without breaking payment calendar. On another hand, it assumes availability of cash and cash equivalents sufficient to repay accounts payable, which need to be paid immediately. At the same time, the cash equivalents mean short-term, highly liquid investments, which might be converted to cash and be of insignificant risk of changes in value, and their placement term is usually not more than 3 months (Khan & Jain, 2007). In international practice, cash equivalents also include overdraft and credit.