Solvency evaluation, comparing traditional financial situation assessment methods with information from cash flow statements, using data from insolvent companies in the Republic of Latvia

Abstract

Insolvent companies negatively effect on the country's overall social and economic development. In Republic of Latvia between 2011 and 2016, each year an average of 870 companies was being proposed with insolvency. In order to minimize or avoid the company’s insolvency it is important to timely evaluate company’s business activities and to take appropriate decisions. Company performance analysis can be made with traditional financial analysis ratios, which are calculated by using the balance sheet and profit and loss statement data, but, based on the views of theorists and authors previous study results, it is also important to use the cash flow statement data analysis. In the research were used fifty freely chosen, in the Republic of Latvia registered companies whose insolvency procedure started in the period from November 1, 2014 to December 31, 2016, and which operate in one of the four following sectors: trade sector, transportation, sector of services or production. In order to rapidly assess the company's ability to pay, thereby avoiding the possibility for the company to fall into the insolvent company's status, the authors put forward the objective of the study: explore, compare and assess the solvency indicators, which are calculated using the traditional methods of financial analysis and cash flow statement, developing proposals for solvency prediction. To achieve this goal there were used economic analysis and synthesis method - studying the theoretical aspects and corporate reports, statistical methods - data processing and analysis, as well as the logical constructive methods of interpreting the results of the study, setting conclusions and recommendations. In the research, there were defined conclusions and formulated proposals for company’s business analysis in order to timely detect and avoid the corporate insolvency. The most important of them are included in the conclusion part. The article has a theoretical and practical meaning in solvency forecasting through traditional financial situation evaluation ratios and cash flow statements.