Changes in estimates of the probability of bankruptcy of Russian companies in terms of economic sanctions

Doctor of Economics S.Kaledin

Candidate of Sciences (Philology) K. Zemlyakova

Chelyabinsk Institute of Economics and Law named after M.V. Ladoshin, Russia

CHANGES IN ESTIMATED PROBABILITY OF RUSSIAN COMPANIES BANKRUPTCY ON THE ASSUMPTION OF THE ECONOMIC SANCTIONS

Until recently, the economic entities in Russia made an assessment of their financial and economic situation according to the traditional procedures, prevalent for the decades. These techniques have played a positive role at a certain stage of development, as the Russian state, and the world economy as a whole. However, it seems the time has come to change the tradition in determining financial stability, solvency, liquidity, business enterprises, associations, sectors of the economy to make substantial changes in the conditions of economic sanctions aimed at weakening of the national economy. The approaches to the determination of the probability of enterprises’ bankruptcy, which are mainly based on the theories of Western economists, require changes.

Modern, fast-paced world with its complex, multistage economy requires a modern approach to the assessment of the enterprise efficiency, industries, national state economies.

Previous techniques for analyzing the financial condition of business entities were based on “mechanical” calculations of individual indicators and ratios, the objective component wasn’t taken into account and the subjective component requires rethinking and reworking. The calculations were based mainly on accounting data and balance indicators. When using the traditional methodology for assessing the financial condition, the economic situation of an enterprise, association, industry and the national economy as a whole it was required before analysis to confirm the actuality of the balance and other financial statements, which were not often carried out. Because of this analysis has been losing its meaning.

To make an indirect analysis to assess the costs of raw materials, water, transportation, consumption of heat and electricity in natural and cost indexes is still topical. What caused an attempt to make a new approach to the analysis and evaluation of the financial and economic status of business entities? In our opinion previously existing techniques did not take into account a number of variables that significantly affect the economics and finance at the micro–, meso– and macrolevels. In the algorithms for calculating indicators political (or objective, external component) and social (mostly subjective or internal) component were not included. But according to the classical theory we know that politics is a concentrated expression of economics. It is sufficient to mention the so-called “Black Tuesday”, “default”, the imposition of economic sanctions and other impacts on the economy of the country from the viewpoint of politics. You must admit that the economy of business entities in a state affect such factors as:

1. The political decision-making or at least political statements of the leaders of a state;

2. The state of the world economy as a whole, the level of world prices for energy, raw materials, high-tech engineering products, products of the chemical and defense industries, etc.;

3. The general state of the national economy (the index of a state);

4. The level and dynamics of inflation;

5. The refinancing rate of the Central Bank of Russia;

6. Dynamics of the national currency;

7. Changes in tax laws.

The author of the article would attribute the above-mentioned to the “political” or “external” part of the analysis of the economic entity.

It seems logical to refer the personnel policy in the economic entity to the “social” component. It's not a secret that sometimes to train a specialist in a company on a particular position it can take more than one year. It should be borne in mind that the turnover of personnel, ill-considered personnel policy (training, re-training, succession, social benefits, mortgages, etc.) might affect the financial stability, business activity, and other indicators of financial analysis, economic stability of the economic entity.

In accordance with the aforesaid it seems logical that those primary sources, which have been mainly used so far for the analysis of financial and economic activity (exclusively reporting balance sheet data) in the modern economy are not sufficient.

All bankruptcy prediction systems include several (from two to seven) key indicators characterizing the financial condition of a company or organization. On the basis of these indicators, in most cases, complex index of the bankruptcy (Z) with weighting coefficients as indicators (K1, K2, K4, etc.) is calculated.

The key indicators in assessing the risk of bankruptcy are coefficients obtained by multiplying by indicators: liquidity, solvency, financial stability, profitability and business activity in a particular modification.

Criteria for assessing the risk of bankruptcy is the indicator or set of indicators calculated by experts on the basis of statistical data that reflect the boundaries of the financial situation of an economic entity, for which financial condition may be found to be satisfactory when the crisis does not threaten the state with showing signs of pre-crisis state, pre-crisis, crisis or critical state.

The purpose of these methods and models is to predict the occurrence of a crisis situation in advance, even before its obvious signs.

It should be noted that the majority of Western methods were calculated on the basis of the Western tradition of conducting finance, taking into account the payment settlement discipline, capital structure, etc. That’s why the transference these methods to the Russian practice without proper adjustments can give too optimistic or too pessimistic scenario, on the contrary of the life cycle of a business entity in the Russian Federation.

At present, the method of calculating the probability of bankruptcy of enterprises according to methods of well-known Western and Russian economists are widely used by the subjects of the Russian economy in the analysis. It seems that, in any case, in the current Russian economy environment Western techniques were perceived by Russian specialists priori, i.e., without periodic critical rethinking their relation to modern conditions. Therefore, critical rethinking and refining existing techniques is extremely important at the present time. The same can be said about the procedures of Russian economists A. D. Sheremet, L. V. Dontsova, O. V. Efimova et al. On the assessment of financial stability, solvency, liquidity, business activity, profitability Russian legal entities.

We cannot, of course, avoid mentioning the fact that Russian scientists have noted in their works that the use of Western methods should be approached cautiously enough. Thus, in particular, L. V. Dontsova states in her publications that E. Altman’s five-factor model is applied only to joint stock companies whose shares are freely traded on the stock market. In her remarks there are doubts about the weight coefficients constants. She concludes that any economic situation, including bankruptcy, can only be predicted with taking into consideration the information on trends in external factors changes.

The issue of critical evaluation of these techniques did not come out of nowhere, and is associated primarily with the fact that without taking into account the specifics and peculiarities of the Russian economy in modern conditions and in applying these techniques (especially Western) in a straight manner, a large number of Russian companies falls under the category of “bankrupts” or their condition can be assessed as pre-crisis. Thus, in the author’s opinion, the Russian economy suffers considerable material damage, since, on the one hand, the assessment of Russian enterprises discourages potential investors, on the other, these techniques have become a tool in the hands of unscrupulous politicians, businessmen and other interested parties on intentional bankruptcy of our businesses, and even large companies and industries in order to seize their assets in the future.

Moreover, it appears that it is impossible to solve difficult tasks affecting the underlying processes (occurring in the modern economy of Russia) with simplified schemes and techniques without considering the constantly and rapidly changing situation, both in Russian and in today’s global economy.

In assessing the probability of bankruptcy of Russian companies, business entities, it seems appropriate to complement E. Altman’s formula with nine coefficients (factors) that offer the most complete characterization of the company’s financial condition and have not been included in this methodology, namely:

1. The current ratio (the ratio of current assets to current liabilities) — K_6R;

2. The own funds ratio (the ratio of own sources of financing to the balance sheet) — K_7R;

3. The financial profitability (the ratio of net income to equity) — K_8R;

4. The ratio of commercial margin (ratio of net income to sales of products, services) — K_9R;

5. The ratio of social stability (the ratio of turnover in per cent at the end of the period to the beginning of the period) — K_10R;

6. The coefficient of stability of the national currency (the ratio of the average value of the total rate of RUB to USD and RUB to EUR at the beginning of the period to this indicator at end of period) — K_11R;

7. The promotional rate of development of national industry — K_12R;

8. The universal stock index state of the national economy — K_13R;

9. The stability coefficient tax component — K_14R.

After analyzing the methodology for determining the probability of bankruptcy, proposed by domestic and foreign experts, the author proposed a new model of its determination, including both classical component, as amended, and the new block coefficient taking into account the impact of external and internal factors on the outcome of the assessment.

The proposed model for the evaluation is as follows:

Z_R=7K_1R+7K_2R+12K_3R+8K_4R+4K_5R+4K_6R+7K_7R+

7K_8R+4K_9R+7K_10R+7K_11R+9K_12R+8K_13R+9K_14R

where:

K_1R — share of net working capital in assets;

K_2R — the ratio of accumulated profit to assets;

K_3R — economic return on assets;

K_4R — the ratio of the value of shares issued to the borrowings of the enterprise;

K_5R — business activity (asset turnover);

K_6R — current ratio;

K_7R — own funds ratio;

K_8R — financial profitability ratio (coefficient changes sign, in the case of negative values of the numerator and denominator);

K_9R — coefficient commercial margin;

K_10R — factor of social stability;

K_11R — the coefficient of stability of the national currency;

K_12R — a promotional rate of development of the national economy;

K_13R — stock index state of the national economy;

K_14R — the coefficient of stability of the tax component.

It seems important to estimate the probability of enterprises bankruptcy with an analysis of its dynamics, applying the method of trend with a view to the possibility of assessing the likelihood of insolvency in the long run.

References

1. Kaledin S. Actual problems of evaluation of investment and economic entities in modern Russia: Monograph. – Chelyabinsk: Chelyabinsk Printing House, 2004. — 256 p.

2. Kaledin S. Methodology and methods of integrated assessment of the financial and economic activities of businesses: Abstract dissertation for the degree of Doctor of Economics. — Moscow, 2007. — 41 p.