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OPERATIONAL AND FINANCIAL EFFECTIVENESS AS AN INDICATOR OF ENTERPRISE'S SPECIFIC RISK
Abstract
Specific risk of a particular enterprise consists of a risk resulting from the industry, that the enterprise operates in, as well as of a risk resulting from internal specificity of the enterprise. The objective of this paper is to propose author’s method to translate the operational and financial effectiveness assessment into a number, which would reflect a specific risk premium. The paper assumes that specific risk in the enterprise composes of an operational and financial risk, which are a derivative of the effectiveness assessment of the enterprise’s performance in the operational and financial dimension. Depending on the preference, the criteria to assess the effectiveness may be freely selected. These criteria influence the assessment of specific risk, this way creating a set of the so-called diagnostic factors (indicators). In the presented method, it was assumed that the operational effectiveness is measured on the level of the whole enterprise, using a traditional indicator of financial leverage, return on sales and return on assets. On the other hand, financial effectiveness will be characterized by such financial indicators as: degree of operating leverage – DOL, debt-to-equity ratio – D/E, degree of financial leverage – DFL and times interest earned – TIE. The specific risk will be based on scoring assessment, which consists in ascribing a concrete score to the particular criteria. The parameterization of diagnostic factors focuses on comparing them with their average values in the industry, represented by a defined cluster of enterprises, and ascribing a score to them, which corresponds to the particular class of specific risk. The research included statistical methods.
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