Solvency Evaluation, Comparing Traditional Financial Situation Assessment Methods with Information from Cash Flow Statements, Using Data from Insolvent Companies in the Republic of Latvia

By Steinberga, Dzeina; Millere, Inta | European Research Studies, September 2017 | Go to article overview

Solvency Evaluation, Comparing Traditional Financial Situation Assessment Methods with Information from Cash Flow Statements, Using Data from Insolvent Companies in the Republic of Latvia


Steinberga, Dzeina, Millere, Inta, European Research Studies


1. Introduction

Companies added value is the basis for not only the company's development, but also for of the country's overall development. Therefore, any economic entity is interested in, to the company which operates in the long-term run, because if it develops there can be designed not only higher level of profit, but also new jobs and that can brought up national prosperity. However, long-term development is not possible without systematic monitoring of company and its ability to efficiently use all resources. Working with financial information and analyzing it is necessary to explore many details and elements that could have a significant impact on the financial position and stability.

According to the authors opinion, it is necessary to examine both the income statement results and cash flow statement. Both of these statements comparison can provide important information. It also stresses Loukopoulos and Roupas (2014) in their work "Financial Analysis of the Greek Private Health Sector Over the Last Decade (2002-2012)." The comparison between earnings and operating cash flows, informs us about the amount of the accrued profits and hence on the quality of accounting information. Generally the difference between these figures and their volatility is not desirable." Ever since the early 20th century, when its origins lie in the financial analysis, that time and contemporary authors argue about traditional financial situation assessment methods, however, according to the authors, for objectivity also it is necessary to use the information provided by cash flow statement. In order to achieve the goal of the study (to explore, to compare and assess the solvency indicators, calculated using the traditional methods of financial analysis and cash flow statement, and as a result develop proposals for solvency prediction), the authors put forward the main tasks:

1. to compare the cash flow statement of the information provided by traditional financial analysis methods and their information;

2. to perform fifty insolvent company's financial position representing by four different industries cash flow ratio analysis and traditional financial analysis factor assessment;

3. to make fifty insolvent company's representing by four different industries financial position, cash flow ratio analysis and traditional financial analysis ratio's assessment;

4. to compare the cash flow ratio results with traditional financial analysis ratio results;

5. to make conclusions on the cash flow statement importance in the company's solvency evaluation;

6. to make proposals in order to improve the company's solvency assessment, using the cash flow statement information.

For the research object, were determined fifty freely selected companies that at first were grouped according to the following criterio. Companies that are registered in Republic of Latvia, which in the period from November 2014 to December 2016 started insolvency procedure and which following the Article 54 of the "Annual Account Law" requirements, had prepared a cash flow statement for at least five years prior the insolvency proceedings initiating, and which operate in one of the four following industries: trade, transport, service or production. Analysis of 50 selected companies in four different industries, were selected out of 110 companies that met the authors set requirements for selection criteria and for which an insolvency procedure was started in the period from November 2014 to December 2016.

In order to provide the widest possible and accurate summary of financial ratios calculation results, authors used different mean values to display absolute values and ratios results, however, all were based on the mean values in order to more visible and more accurately show the results. Overall, to the data analysis authors used the following mean values techniques: arithmetic mean, median, arithmetic mean which calculation is based on the values of which excluded "outliers" values, arithmetic mean which calculated with Excel formula TRIMMEAN and which is based on the arithmetic mean, but from which, at first, were excluded common data series with its upper and lower values in excess of 2%. …

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