METALLURGICAL ENTERPRISES GOODWILL MANAGEMENT ON THE BASIS OF A RATING EVALUATION USING THE OPTIMAL FINANCIAL RATIOS

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1 International Journal of Mechanical Engineering and Technology (IJMET) Volume 9, Issue 12, December 2018, pp , Article ID: IJMET_09_12_114 Available online at ISSN Print: and ISSN Online: IAEME Publication Scopus Indexed METALLURGICAL ENTERPRISES GOODWILL MANAGEMENT ON THE BASIS OF A RATING EVALUATION USING THE OPTIMAL FINANCIAL RATIOS Elena Yurevna Sidorova, Oleg Igorevich Kalinskii, Gennadii Alekseevich Molchanov and Nadegda Vasilevna Shmeleva National University of Science and Technology MISiS Moscow, Russia ABSTRACT The purpose of the article was to develop a method for managing the business reputation (goodwill) of a metallurgical enterprise based on the solution of the optimization problem. The objective function was the worked out rating assessment, oriented to goodwill and capitalization of the enterprise. The variables were the relative volumes of working capital and short-term debt. The math model methods of calculations were used in the article. The article showed that the volumes of an industrial enterprise current assets and short-term debts were not always optimal from the efficiency point of view. A proposed management system allowed achieving a capital structure in which it would be possible to obtain resource savings through the lean use of current assets in a stable or falling market. The system also let to prevent a shortage of working capital and sources of financing during periods when the demand is high. The model introduction at the leading Russian metallurgical enterprises showed that the implementation of such procedures allowed achieving sustainability of the enterprise, the goodwill growth and the capitalization of the metallurgical enterprise, which is extremely important for its long-term sustainable development. Keywords: goodwill, business reputation assessment, goodwill management, working capital, short-term debt, lean manufacturing, metallurgical enterprises. Cite this Article: Elena Yurevna Sidorova, Oleg Igorevich Kalinskii, Gennadii Alekseevich Molchanov and Nadegda Vasilevna Shmeleva, Metallurgical Enterprises Goodwill Management on the Basis of a Rating Evaluation Using the Optimal Financial Ratios, International Journal of Mechanical Engineering and Technology, 9(12), 2018, pp INTRODUCTION The opportunities of influencing goodwill and capitalization through optimization of the structure and added value, as well as assets (primarily current) and liabilities on the example of ferrous editor@iaeme.com

2 Elena Yurevna Sidorova, Oleg Igorevich Kalinskii, Gennadii Alekseevich Molchanov and Nadegda Vasilevna Shmeleva metallurgy enterprises were described in previous works [1-4]. However, the authors consider that it is very important to find additional reserves within the company that could influence the increase of its capitalization and goodwill (see Note). 2. METHODS The comparison methods for the selection of financial ratios and analyzing the firm's sustainability, long-term competitiveness. The analytical methods for investigating the relationship between financial ratios and intangible assets, in particular business reputation. The generalization methods for the systematization of scientific knowledge in the field of the market value and goodwill assessment. 3. RESULTS This article describes the procedures for accentuated management of the structure and capital that would lead to increase of business efficiency and accordingly could improve the conditions for the business reputation growth of ferrous metallurgy enterprises. In particular, a rating evaluation has been developed. It is oriented to the capitalization and goodwill growth of Russian metallurgical companies. It can be used to increase the company current assets effectiveness. The approach described below offers an algorithm for managing an enterprise capital structure, which aims to maximize the rating estimate. The rating consists of several key financial ratios that are correlated with the enterprise capitalization and goodwill. As a result of optimization, the overall positive effect is achieved by improving the conditions for the enterprise economic recovery and indirectly creating optimal conditions for the capitalization and goodwill growth. For the diagnostics purposes the dynamics of the analyzed economic indicators are usually considered, and their values, square deviations and other statistical characteristics are calculated. However, it is not always possible to evaluate the economic situation on the basis of individual indicators. In this case, we can use integrated indicators. The general control algorithm considered in this paper is shown in Figure editor@iaeme.com

3 Metallurgical Enterprises Goodwill Management on the Basis of a Rating Evaluation Using the Optimal Financial Ratios Figure 1. Management system algorithm aimed at improving goodwill and capitalization through impact on the rating score The first step of the algorithm presented in Figure 1 is the definition of the model for constructing the integral indicator. The rating of the j-th enterprise used in this paper [5] was set as: =, (1) Where: n - Number of indicators used for the rating; Ni - regulatory requirements for the i-th financial ratio; Ki - the i-th financial ratio; 1 - The weight index of the i-th coefficient. We used for Ni calculation weighted by revenue ratios of the technological group enterprises for the last 3 years. If the financial ratios K1, Kn fit their normative minimum levels, the rating of the enterprise will be equal to 1. The financial condition of enterprises with a rating score of less than 1 is characterized as unsatisfactory. The statement is true if all the values of Ki are positive. Such an additive model for constructing a rating assessment is one of the main approaches for forming an integral indicator of the enterprises activity. Each coefficient was expertly evaluated as equivalent, but it was allowed to assign to each component of the model a different weighting factor. The authors used 32 financial coefficients, formed into 5 groups. The coefficients were chosen in accordance with the work of N. Kondrakov [6]. These include the following factors: a) Coefficients of profitability Rki: editor@iaeme.com

4 Elena Yurevna Sidorova, Oleg Igorevich Kalinskii, Gennadii Alekseevich Molchanov and Nadegda Vasilevna Shmeleva 1) - the overall return on assets; 2) - net profitability of assets; 3) - the overall return on equity; 4) - net profitability of own capital; 5) - profitability of inventories and fixed assets; b) Management effectiveness ratios Efki: 1) - profit on sale per 1 rub. Sales; 2) - net profit per 1 rub. Sales; 3) - balance profit per 1 rub. Sales; c) Coefficients of business activity Aki: 1) - asset turnover ratio; 2) - coefficient of circulating assets turnover; 3) - factor of inventory turnover; 4) - factor of accounts receivable turnover; 5) - coefficient of funds and short-term financial investments turnover; 6) - coefficient of own capital turnover; 7) - coefficient of fixed assets turnover; d) Coefficients of financial stability Fki: 1) - coefficient of ownership (autonomy); 2) - ratio of debt to equity; 3) - own working capital; 4) - the ratio of non-current assets and equity; 5) - the ratio of own current assets to their total amount; 6) - the ratio of net profit, reserves and receivables to sales proceeds; 7) -the ratio of fixed assets after deduction of reserves to the balance currency; 8) - the ratio of long-term debt to borrowed funds; 9) - the ratio of short-term debt to borrowed funds; 10) - the ratio of accounts payable to suppliers and borrowed funds; e) Liquidity and solvency ratios Lki: 1) - ratio of cash and short-term financial investments to the balance currency; 2) - the ratio of receivables to the balance currency; 3) - the ratio of stocks and accounts receivable to the balance currency; 4) - the ratio of non-current assets to the balance currency; 5) - absolute liquidity ratio; 6) - quick liquidity ratio; 7) current liquidity ratio. On 2-4 algorithm steps it was determined that the indicator should include the coefficients Ki most correlated with the relative values of goodwill, that is, with the goodwill-to-assets ratio and at the same time maximally correlated with the relative capitalization ratio. As a result, the subsequent management procedure more accentuated than simply using standard variants of the rating evaluation. At the same time, this approach, when the rating assessment requires a focus on two targets at once, may have contradictions. They are expressed in the fact editor@iaeme.com

5 Metallurgical Enterprises Goodwill Management on the Basis of a Rating Evaluation Using the Optimal Financial Ratios that the correlation of different coefficients from one semantic group with various targets can be different. In this case, the coefficient for inclusion in the model is determined on the basis of a logical analysis and a comparison of each conflicting coefficient correlation. In the framework during this study, such a contradiction did not arise, which was due to the functional relationship between the target indicators - capitalization and goodwill. It is important to note that in the case of choosing two or more factors from one semantic group, the multicollinearity of these variables is possible. In this paper, the multicollinearity of the variables was eliminated by the logical approach, according to which only one coefficient from each sense group was included in the model. As a result, the rating estimates obtained in this paper were oriented both to the growth of company capitalization and goodwill, since the chosen financial coefficients for the estimates coincide. Approbation of developments was carried out on the basis of model calculations using the metallurgical enterprises data - PAO Severstal (A) and NLMK Group (B). For metallurgical enterprise a, correlation of financial ratios with target indicators of relative goodwill and capitalization is shown in Figure 2. Figure 2. The correlation coefficients of the relative goodwill and capitalization ratios with the main financial ratios (for enterprise A) As a result of the financial ratios correlation analysis with targets for enterprise A, the following financial ratios were selected for inclusion in the rating: Efk1, Ak1, Fk11 and Lk3, that is, one of each of the semantic groups. At the same time, the groups of efficiency and profitability indicators were considered as one group due to close economic meaning. As can be seen from the graph in Figure 2, practically each of the selected financial coefficients has in its group the maximum correlation coefficient with and. As a result, for the enterprise A, a model was obtained that includes 4 financial coefficients: =! ".$% &! ".'( & )!! "."** & +, ".** -= & (2) Where: Profit on sale per 1 rub. Sales; 2 Coefficient of asset turnover; 6 2 Ratio of accounts payable to suppliers and borrowed funds; Ratio of stocks and accounts receivable to the balance currency. The selection of coefficients based on the correlation values for metallurgical enterprise B is shown in Figure editor@iaeme.com

6 Elena Yurevna Sidorova, Oleg Igorevich Kalinskii, Gennadii Alekseevich Molchanov and Nadegda Vasilevna Shmeleva Figure 3. The correlation coefficients of the goodwill and capitalization relative indicators with the main financial coefficients (for enterprise B) Taking into account stage 5 of the algorithm, various variants of financial coefficients sets were considered in the rating model for enterprise B. As a result, a model was obtained that included 4 financial coefficients, which gave the best correlation with the specific values of goodwill and capitalization: Where: 0 2 Profit on sale per 1 rub. Sales; 9 = 1 4 ; & & & 7 2% 3.434?= = & & 2 Coefficient of receivables turnover; 6 2 Coefficient of ownership (autonomy); 7 2% Coefficient of current liquidity. The rating estimate of the j-th enterprise is proposed to be used to determine the potential capacity of the enterprise to change the volume of current assets and short-term debt. In the work of I. Rozhkov [4] it was established that this estimate, as well as the specific indicators of goodwill and capitalization themselves, depend quite rigidly on the coefficients p1 and p2. However, this dependence has a more stable and strong correlation relationship. We suggest the indicated rating connection with the p1 and p2 use as the form of second order polynomials. This is a two-dimensional statistical regression model, which is formed by the method of variables sequential inclusion. For example, for the metallurgical enterprise A, the specified link formed in the STATISTICA 8.0 data analysis software package has the following form: $ $, Where C - the multiple regression coefficient; t1, t2, t3, t4, t5 values of Student's t-test for the i-th regression coefficient. For a metallurgical enterprise B, this relationship has the following form: 9 $ & (3) (4) editor@iaeme.com

7 Metallurgical Enterprises Goodwill Management on the Basis of a Rating Evaluation Using the Optimal Financial Ratios $ $ D E! =19.37; D E! G =A9.3; D EG G =4.67; D E! E G =A9.23; C =0,991 (5) Relations (2) - (5) are calculated from the data of 67 balance sheets for for both companies A and B. The rating is oriented to the enterprise goodwill in connection with which the goal was to maximize it. The objective function of the task is: &H $ $ & $ &H $ $ JK (6) We use as the objective function relations (4) and (5): The constraints: $ $ JK 9 $ & $ $ C CMN,@ $ $ CMN Solving this problem, we can find the optimal values OPQ $ OPQ. CMN C $ we choose the initial values at the end of the previous time interval (for example, quarter), increased and reduced by a small amount (for example ± 3%, taking into account the financial capabilities of enterprises, determined from experience of its operation). In fact, the solution of this optimization problem with respect to the conditions of a particular metallurgical enterprise makes it possible, using the statistics of the best operational experience, to determine such values of the relative volumes of current OPQ and short-term OPQ $ that create the most favorable conditions for the growth of the goodwill of the company, as the rating function, aimed at the growth of goodwill. This will determine the optimal absolute volumes of working capital R OPQ ос and short-term debtu Q & P V OPQ. Using the values obtained it is possible to determine the deviations of the actual working capital volumes from the optimal ones, as well as similar deviations for short-term debt. The deviations found may indicate the need for an enterprise to reduce or increase the resources consumption. Under the potentially possible value of the indicator, we will understand its value, obtained as a result of the enterprise economic indicators management, taking into account the influence of external factors on the efficiency of its operation. Potential values are due to the fact that when solving problem (6), the minimum and maximum values of the constraints values with respect to p1 and p2 are established taking into account the potential financial possibilities of the enterprise. (7) (8) (9) editor@iaeme.com

8 Elena Yurevna Sidorova, Oleg Igorevich Kalinskii, Gennadii Alekseevich Molchanov and Nadegda Vasilevna Shmeleva In addition, the influence of external factors due to their chance can be estimated only approximately. When considering examples of potential assessments, we will only consider estimates obtained as a result of optimizing the management of the enterprise working capital. Next, we turn to the analysis of the initial and optimal values of the ratings for each enterprise. The dynamics of the initial and optimal calculated values of enterprise A considered rating from 2000 to 2016 is shown in Figure 4. Figure 4. The dynamics of the initial and optimal calculated values of enterprise A On Figure 4 we find a certain volatility of the rating, but the graph reflects the trend, which is also characteristic for other enterprises considered below: the rating decreases by the middle of the 2000s relative to the level of the first half of the decade. In many ways, this factor is related to the state of the external environment and prices in the world metal market. The dynamics of the initial and optimal values of the ratings for enterprise B is shown in Figure 5. Figure 5. The dynamics of the initial and optimal values of the ratings for enterprise B Figure 5 presents the dynamics of the initial and optimal calculated values of the enterprise B from 2000 to It can be seen from the figure that during the period from the beginning of 2000 to the end of 2005 there was a steady growth in the indicator. Then the values of the rating with some fluctuations gradually decreased to a little less than 1.5 % by the end of Beginning from 2008, the rating level of the enterprise B fluctuated from 1 to 1.5 % and it can be called quite stable. In addition, the optimization procedure has a positive impact on the rating level: on average, the optimal estimates are 2-2.5% higher than the original ones editor@iaeme.com

9 Metallurgical Enterprises Goodwill Management on the Basis of a Rating Evaluation Using the Optimal Financial Ratios We consider the examples of using the rating evaluation in diagnosing the state of an enterprise. If it is a question of one enterprise, for the specified purpose it is possible to use the described procedure of differences between optimum and initial values definition for circulating assets and for short-term debts. In relation to enterprise A, the dynamics of these differences presented in Figures 6 and 7. Figure 6. Dynamics of the difference between optimal and initial values of circulating assets for enterprise A Figure 7. Dynamics of the difference between the optimal and the initial values of short-term debt for enterprise A Using these dependencies and taking into account the financial situation at the enterprise, it can be concluded that the enterprise is experiencing a certain shortage of circulating capital, which can partly be attributed to the shortage of sources of financing, including short-term ones. In relation to enterprise B, the dynamics of the differences between the optimal and initial values of current assets and short-term debt is presented in Figures 8 and 9. Using these dependencies and taking into account the financial situation at the enterprise, it is possible to increase the potential for saving working capital volumes and short-term liabilities with a change in the financing structure of negotiable assets in favor of own or long-term borrowed funds editor@iaeme.com

10 Elena Yurevna Sidorova, Oleg Igorevich Kalinskii, Gennadii Alekseevich Molchanov and Nadegda Vasilevna Shmeleva Figure 8. Dynamics of the difference between the optimal and the initial values of circulating assets for the enterprise В Figure 9. Dynamics of the difference between the optimal and the initial values of short-term indebtedness for the enterprise B In conclusion, it should be noted that the economic sense of the described management procedures is as follows: often the enterprise uses irrationally the circulating assets, which leads to a decrease in their mobility, as well as the growth of the costs of their formation. The proposed algorithm for solving the optimization problem makes it possible to find out what volumes of working capital and accounts payable are currently optimal for the enterprise from the point of view of creating optimal conditions for the growth of business reputation. If the problem solution shows the need to reduce the working capital, this means that the total amount of the working capital in the enterprise is excessive, causing the turnover to suffer, and there is a need for additional financing for these "inefficient" current assets. Reduction of working capital and, accordingly, short-term sources of financing is an adequate tool for lean management (in particular, this method is applicable within the framework of the Lean strategy implementation, which allows increasing the efficiency of the company and increasing its goodwill [7, 8]. On the other hand, a fairly common result of solving the optimization problem is to identify the need to increase working capital, as well as resources to ensure them. In this case, it should be said that the enterprise has the risk of being in a situation of insufficient current capital (for example, in the conditions of a growing market) and to lose profit due to a shortage of funds to increase production at operating facilities (widespread situation in the Russian ferrous metallurgy editor@iaeme.com

11 Metallurgical Enterprises Goodwill Management on the Basis of a Rating Evaluation Using the Optimal Financial Ratios in the post-crisis period , when in conditions of total economy, producers did not always manage to adequately respond to the increasing demand by timely increase in stocks of raw materials and materials) [9, 10]. 4. CONCLUSIONS To achieve high efficiency of the enterprise and increase its capitalization and goodwill, lean management of current assets and short-term debts is, although not the most obvious, but at the same time very effective tool. Thus, a management method based on the solution of the optimization problem is proposed, in which the developed rating assessment, oriented to goodwill and capitalization of the enterprise, acts as the objective function, and the relative volumes of current assets and short-term debts are used as variables. It is shown that the volumes of current assets and short-term indebtedness of an industrial enterprise are not always optimal from the point of view of effective functioning. A management system is proposed that allows to achieve a capital structure in which it would be possible to achieve resource savings through the lean use of current assets in a stable or falling market and at the same time to prevent a shortage of working capital and sources of financing during periods when demand is high. On the basis of model calculations, it is shown that the introduction of such procedures makes it possible to achieve sustainability of the enterprise and the goodwill and the capitalization growth, which is extremely important for metallurgical enterprises long-term sustainable development. NOTE The author s position coincides with the position of a significant number of scientists who consider "business reputation" and "goodwill" to be related and often similar concepts, since Goodwill is a quantitative estimate of the business reputation on the balance sheet of a company in acquisitions (merges) of assets. REFERENCES [1] Kalinsky, O., Rozhkov, I., Markov, S., Redkina, E. Development of the methodology for determining goodwill - An indicator of the company's excessiveness on the example of Russian ferrous metallurgy enterprises. Bulletin Ferrous Metallurgy, 11, 2006, pp [2] Kalinsky, O., Larionova, I., Markov, S., Rozhkov, I., Gorbatenko, M. Coefficient method of value added indicators management to ensure the enterprise sustainable growth (on the example of iron and steel plants of the Russian Federation). Bulletin of Samara State Economic University, 4(54), 2009, pp [3] Kalinsky, O., Rozhkov, I., Afanasyev, V., Stepanova, M., Gorbatenko, M. Use of rational values choice methods for goodwill management at the enterprise. Bulletin of Samara State Economics University, 9(71), 2010, pp [4] Rozhkov, I., Kalinsky, O., Markov, S., Larionova, I., Gorbatenko, M. Comprehensive assessment of the financial and economic situation of the enterprise, focused on indicators of the products added value (On the example of steelmaking enterprises of the Russian Federation). Economics in Industry, 3, 2009, pp [5] Sheremet, A., Sayfulin, R. Finance of enterprises: Management and analysis. Moscow: INFRA-M, [6] Kondrakov, N. Accounting for managers: Accounting and financial and economic analysis. Moscow: Business, [7] Baranov, V., Zaitsev, A., Sedlarzh, J. The concept of lean production in the system of strategic enterprise management. Russian Entrepreneurship, 6, 1(160), 2010, pp editor@iaeme.com

12 Elena Yurevna Sidorova, Oleg Igorevich Kalinskii, Gennadii Alekseevich Molchanov and Nadegda Vasilevna Shmeleva [8] Womek, J., Jones, D. Lean production. How to get rid of losses and achieve prosperity for your company. Moscow: Alpina, [9] Sidorova, E., Zhaglovskaya, A., Savon, D., Safronov, A. Production activity analysis methodology for open pit coal mines (In terms of Shestaki open pit mine). Eurasian mining, 1, 2017, pp [10] Shmeleva, N., Eliseeva, E. Environmental sustainability and competitiveness: construction of indicators system for Russian metallurgical enterprises. In Conference proceedings SGEM, Bulgaria, 5, III, 2016, pp DOI: /SGEM2016/B53/S