Enterprise Financial Risk Early Warning System: Establishing The Best Capital Structure

Financial risk as a signal, prompting enterprises must always pay attention to the maturity debt of enterprises, and reserve the necessary cash to cope with the risk of insolvency.

Therefore, it is particularly necessary for enterprises to strengthen financial risk management and establish and improve financial early warning system.

The best capital structure is the capital structure with the lowest capital cost and the largest value of the company.

The commonly used optimal capital structure decision methods include comprehensive cost comparison, earnings per share analysis and company value comparison.

The comprehensive cost comparison method takes the lowest comprehensive cost as the decision-making standard, and the profit per share analysis method takes the highest profit per share as the decision standard. The two methods have a common defect that they do not take risks into account.

The company value comparison method takes the maximum value of the company as the decision standard while considering the risk. Therefore, the company value comparison method is recommended.

Before raising funds, enterprises should forecast the required funds, and calculate the scale of several alternative liabilities based on the retained profits of the year, and then calculate the company value corresponding to different liabilities based on the existing capital structure.

Debt can be divided into two categories: long and short term.

In comparison, long term debt costs are high and low risk; short-term debt costs are low and risky.

If enterprises pursue low cost, they should choose short-term debt; if they pursue low risk, they should choose long-term debt.

How to arrange debt maturity structure correctly for enterprises to reduce costs?

It is very important.

After initially establishing the scale of debt, enterprises can divide the debt into two parts: long and short term according to the normal financing combination.

That is, the funds needed to carry out the current assets of the enterprise are raised through short-term liabilities. The funds needed for long-term assets are raised through long-term liabilities and their own funds.

And then make use of it.

The cash ratio is used to evaluate the short-term debt paying ability of the enterprises, and the long-term debt paying ability is evaluated by using the asset liability ratio and the property rights ratio.

If the present structure makes the debt paying ability too low and the financial risk of the enterprise too large, it tends to adopt a conservative fund-raising combination, that is, more long-term liabilities should be used; otherwise, a risky financing combination should be adopted, that is, more use.

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We can use financial leverage coefficient to measure financial risk.

The coefficient of financial leverage refers to the change of earnings per share, which is the multiple of the change in pre tax profit. If the leverage coefficient is too high, it means that the enterprise has undertaken a larger risk.

As for how high the leverage coefficient is, it should be determined according to the specific circumstances of the enterprise.

If the leverage coefficient calculated by the size of the optimal capital structure is too high, then adjustments must be made.