Abstract
In this paper we aimed to build a composite financial index for measuring the financial health of the companies listed in the AERO (Alternative exchange in Romania) market of the Bucharest Stock Exchange. We used a principal component analysis in order to build this composite financial index using the rates of return, liquidity and the management of 25 companies listed in the AERO market for the period 2011–2018. We conceived this composite indicator as a score function that established according to the numerical values that result from its application when a company was financially healthy, when it had a poor financial health and when it was financially stable. In order to test the financial health of the selected SMEs (small and medium enterprises), we used the one sample t-test under the model of the study and the three classifications of Z (Z < 0—companies with poor financial health, 0 ≤ Z ≤ 0.5—companies with good financial health and Z > 0.5—companies with very good financial health). In this study we also aimed to identify the possible correlations between the solvency rate and the financial health index and between solvency rate and the evolution of some economic and financial measures of the companies’ activities. The results of the regression analysis using panel data showed a positive and statistically significant relation between solvency and the three rates (rates of return, of liquidity and of management, respectively) determined using the analysis of the principal components. The former model of the solvency rate identified correctly 94.9% of the SMEs with poor financial health, 40% of the SMEs with stable financial health and 72.2% of the SMEs with good financial health.
Highlights
The financial sustainability of small and medium-sized companies has a direct and significant influence on the development and growth of the economy where they are located
In the following lines we will diagnose the financial health of the companies, building a composite financial index based on the main rates of liquidity, management and return and using a principal component analysis
After applying the principal components analysis, we identified three principal components which summarized about 72% of the information generated by the initial variables and could identify a model that has the following form: Z-score = 0.166 × return on assets (ROA) + 0.208 × return on equity (ROE) + 0.23 × RLC + 0.159 × RLI + 0.148 × duration of stock rotation (DRS) + 0.184 × duration of short-term receivables rotation (DRC) + 0.103 × DRF
Summary
The financial sustainability of small and medium-sized companies has a direct and significant influence on the development and growth of the economy where they are located. The measure of the financial sustainability of the companies is given by the indicators of performance, liquidity, management and indebtedness, indicating the financial health of the companies. The measure of financial sustainability is given mostly by the degree of the financial health of the companies, which can be diagnosed using several financial indicators such as liquidity, performance, debt and management indicators. In the following lines we will diagnose the financial health of the companies, building a composite financial index based on the main rates of liquidity, management and return and using a principal component analysis
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