Financial condition and bankruptcy likelihood in aviation on the example of the Aeroflot company

Faizuloyeva, Nargis; Olechowska, Karolina Article Financial condition and bankruptcy likelihood in aviation on the example of the Aeroflot company Financial Internet Quarterly Provided in Cooperation with: University of Information Technology and Management, Rzeszów Suggested Citation: Faizuloyeva, Nargis; Olechowska, Karolina (2021) : Financial condition and bankruptcy likelihood in aviation on the example of the Aeroflot company, Financial Internet Quarterly, ISSN 2719-3454, Sciendo, Warsaw, Vol. 17, Iss. 4, pp. 50-69, https://doi.org/10.2478/fiqf-2021-0027 This Version is available at: https://hdl.handle.net/10419/266887 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0/ 10.2478/fiqf-2021-0027 Abstract This study analyses theoretical aspects of bankruptcy and financial analysis. Analysis of bankruptcy diagnostics is the most important condition for successful company management since the results of economic activity depend on the availability and efficiency of the use of financial resources. The study of the institution of bankruptcy is essential for high-quality business conduct. Thus, as a practical part this study implemented analyses of financial condition and bankruptcy likelihood in aviation on the example of one of the biggest airlines – PJSC Aeroflot. Research resulted in findings confirming the instability of the company’s financial condition and downward trend on the Z index related to decrease in demand, mostly due to the pandemic of COVID-19. JEL classification: G3,G33, L93 Keywords: financial analysis, aviation industry, bankruptcy Received: 25.11.2021 Accepted: 03.12.2021 Cite this: Faizuloyeva N., Olechowska K. (2021) Financial condition and bankruptcy likelihood in aviation on the example of the Aeroflot company. Financial Internet Quarterly 17 (4), pp. 50-69. © 2021 Nargis Faizuloyeva et al., published by Sciendo This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License. 1 Student at the University of Information Technology and Management in Rzeszów, Faculty of Management, e-mail: [email protected], ORCID: 0000-0002-8197-7870. 2 Student at the University of Information Technology and Management in Rzeszów, Faculty of Management, e-mail: karolina1olechow- [email protected], ORCID: 0000-0003-2018-9755. loans, attracting investments, in choosing suppliers, and in the selection of qualified personnel. The higher the stability of an enterprise, the more it is independent of unexpected changes in market conditions and, consequently, the less the risk of being on the verge of bankruptcy. This study aims to analyze the current state of the chosen airline’s financial situation in the middle of the global pandemic of COVID-19 and check whether the classical methods of predicting bankruptcy are still valid during this volatile situation on the aviation market. The paper includes theoretical and practical parts. The first chapter contains a review of scientific literature on the financial condition theory and financial analysis of a company, as well as the concept of bankruptcy and description of the company acting as the object of analysis – Aeroflot. The second chapter presents direct and indirect methods used in the determination of the likelihood of bankruptcy. The third, empirical chapter focuses on the presentation of calculated results and analysis of research carried out based on data relating to the selected airline. The theoretical objective of this thesis is to present the specificity of financial analysis for an aviation company, with special attention paid to bankruptcy likelihood and assessment. The empirical objective is to assess the financial condition and bankruptcy likelihood of the Russian aviation company Aeroflot. Financial condition determines the competitiveness of an enterprise and its potential in business cooperation, and it assesses the extent to which the economic interests of the enterprise itself and its partners in financial and other relations are guaranteed. A stable financial condition is formed during all production and economic activities. Determining it for a particular date answers the question of how accurately the company has managed its financial resources over a certain period. Аnу businеss during thеir аctivitiеs cаn рursuе а diverse set оf gоаls. This could bе рrоfit mаximizаtiоn, аugmеntаtiоn оf thе cоmраnу's рrореrtу, аn incrеаsе in thе mаrkеt vаluе оf shаrеs, thе еxраnsiоn оf sаlеs mаrkеts fоr рrоducts, аnd more. Many people, in оnе wау оr аnоthеr are cоnnеctеd to а раrticulаr еntеrрrisе and еxреct frоm it thе Modern economic reality pressures business leaders to continuously make decisions in the face of uncertainty. In conditions of financial and political instability, commercial activity is fraught with various crisis situations, the result of which can be insolvency or bankruptcy. Financial stability is one of the most important economic indicators of an enterprise, which characterizes the efficiency of its work. It is largely determined by the structure of capital and provides competitiveness, potential in business cooperation, and a guarantee of compliance with the economic interests of both the enterprise itself and its partners. In market conditions, the financial and economic activity of the enterprise is carried out at the expense of self-financing, and in the absence of its own financial resources, at the expense of borrowed funds. That is why it is necessary to be aware of not only the financial situation of the enterprise, but also of its financial stability. Studies performed so far in the topic of airline insolvency include research made on the basis of multiple discriminant analysis and artificial neural network methods (Chow et al., 1991, Gritta et al., 2002, Gritta et al,. 2003). Presently, the independence of enterprises in the adoption and implementation of management decisions and their economic and legal responsibility for the results of economic activities is increasing. The importance of the financial stability of business entities is objectively growing. All this increases the role of financial analysis in assessing their production and commercial activities and, above all, the availability, placement and use of capital and income. The results of such an analysis are necessary primarily for shareholders, creditors, investors, suppliers, tax authorities, managers, and heads of enterprises. Gritta (1982) presented a model for air transportation in order to appraise airlines’ financial strength and to predict candidate companies filing for bankruptcy. The author’s analysis was designed to distinguish causes of the airlines’ financial struggles and aims to be a template for decisionmaking employees. Thus, in market conditions, the guarantee of survival and the basis for the stable position of an enterprise is its financial stability. If an enterprise is financially stable, solvent, then it has a variety of advantages over other enterprises of the same profile for obtaining SL - short-term loans and credits, Ap - accounts payable. According to Sheremet (2013), components of a comprehensive financial analysis are solvency, financial independence, sustainability, stability, structure of assets and liabilities, business activity, turnover, capital efficiency and liquidity. On the other hand, Stone & Hitching (2014) distinguish the following factors of the analysis: solvency, structure of assets and liabilities, business activity, turnover, capital efficiency and investments. These are noticeably disparate in relation to what has been presented by Aksenov (2014), who highlighted the importance of financial dependence, liquidity, profitability, and market activity in the analysis. Finally, research presented by Van Horne and Wachowicz (2009) include the following components of the analysis: the structure and dynamics of the property of the enterprise, liquidity, the ratio of cash flow and debt, the ratio of equity capital and debt, and the degree of coverage of interest payments by profit. All methods of a comprehensive analysis of the financial condition of an enterprise are subordinated to one goal - obtaining, in a short time, reliable, expansive information about the financial condition of the enterprise. According to Honadle et al. (2003), finаnciаl cоnditiоn may generally be dеfinеd аs thе sоlvеncу оf thе еntеrрrisе. Hоwеvеr, in businеss рrаcticе, thеrе is а mоrе рrаgmаtic dеfinitiоn оf thе tеrm, sреcificаllу аs thе аbilitу fоr а cоmраnу tо crеаtе mоnеу оr similаr еquivаlеnts, which, in turn, аrе а guаrаntее оf rерауmеnt оf finаnciаl оbligаtiоns. Bаsеd оn thе аbоvе statement, it cаn bе summаrizеd thаt finаnciаl cоnditiоn is а quаntitаtivеlу еxрrеssеd dеgrее оf thе еntеrрrisе's finаnciаl rеsоurcеs аt а cеrtаin timе оr within а cеrtаin реriоd оf timе, which еnsurеs thе stаbilitу аnd рrоsреritу оf thе cоmраnу. Аll еntеrрrisеs fоr thе imрlеmеntаtiоn оf businеss ореrаtiоns must hаvе sоurcеs оf funds. In а mаrkеt еcоnоmу, thеу fаcе cоmреtitiоn frоm оthеr еcоnоmic еntitiеs fоr аttrаcting finаnciаl rеsоurcеs intо thеir turnоvеr. Thе оwnеrs оf funds will аgrее tо раrticiраtе in cоmраnу’s operations with thеir cарitаl оnlу аs lоng аs it рrоvidеs thеm with а highеr rеturn оn invеstmеnt cоmраrеd tо оthеr firms with а sufficiеnt lеvеl оf finаnciаl indереndеncе. Оthеrwisе, thе mеmbеrs оf thе cоmраnу will lоsе раrt оf thеir incоmе, еithеr duе tо lоw рrоfitаbilitу, оr аs а rеsult оf thе finаnciаl dереndеncе оf thе еntеrрrisе, whеn mоst оf thе disrеаlizаtiоn оf sреcific gоаls. Hоwеvеr, tо аchiеvе аll оf thеsе gоаls, it is imроrtаnt to note whether thе еntеrрrisе will cоntinuе its functiоning оn а cеrtаin scаlе fоr а lоng timе or whether it will nоt bе liquidаtеd оr rеоrgаnizеd in thе uрcоming futurе. According to Du Jardin (2009), variables which the best reflect the possibility of company’s financial problems in the future fall into three categories. The first category of variables describes those factors which reflect the state of the company (balance sheet, income statement). The second represents environment (growth, interest rate, employment rate). The last is linked directly to the financial market and its ability to evaluate the risk of insolvency. Analysis of the financial condition of an enterprise begins with the study of its property, assessment of the composition, structure, placement and use of funds (assets) and sources of their formation (liabilities) according to the balance sheet. For this, a comparative analytical balance is drawn up, in which the assets are grouped according to the degree of liquidity growth, and the sources - according to the urgency of the onset of obligations. The comparative analytical balance allows us to conclude through which sources there was an inflow of new funds and in which assets these funds were invested. After a general assessment of the property status of the economy and its changes during the analyzed period, its financial stability is studied. It is the main criterion for the reliability of the entity as a commercial partner, as it allows us to assess the ability to ensure an uninterrupted process of financial and economic activities and the degree of coverage of funds invested in assets by own sources. The structure of assets and liabilities can be represented as follows: where F - fixed assets and investments, M - material circulating assets (stocks and costs), AR - accounts receivable, C - cash and short-term financial investments, S - sources of own funds (capital and reserves), L - long-term loans and credits, 1) determination of financial position, 2) identification of changes in the financial condition in the spatio-temporal context, 3) identification of the main factors causing changes in the financial condition, 4) forecast of the main trends in the financial condition. Thus, the main task of the analysis of the financial condition is the timely identification and elimination of shortcomings in financial activities and finding reserves for improving the financial condition of the enterprise and its solvency. Thе рrоblеm оf insоlvеncу аnd bаnkruрtcу оf а dеbtоr whо dоеs nоt fulfill his оbligаtiоns is оnе оf thе mоst рrеssing рrоblеms оf а mаrkеt еcоnоmу. Bankruptcy of legal entities, or rather, the essence of the procedure is as follows: if a company is not able to pay off its debts, it either provides its property to creditors for its sale as debt, or special measures are introduced in relation to it, aimed at restoring solvency. Any company should be aware of its financial position, because even during a period of growth, it cannot be completely sure of its future. That is why diagnostics, assessment and forecasting of bankruptcy are an integral part of the further functioning of the organization. It is important to mention that bankruptcy analysis is one of the tools of the company's investment policy, due to the exposure to the risks of this activity. Also, in the case of bankruptcy, the effectiveness of the company is assessed, its past, present, and future income and development prospects, which as a result reflects the real business value. Due to the above-mentioned aspects, it is necessary to diagnose the company for the likelihood of bankruptcy in a timely manner. It is of high importance to note that there is no universal way to predict it, although it is necessary to track the dynamics of certain indicators in order to respond in time to their deviations. The presence of a high level in these indicators does not mean that there is no threat, because it is in comparison with previous years that a negative trend can be identified. According to Monden (2014), crisis is an extreme business risk of failing to respond to rapid and signifidistributеd рrоfits аrе duе tо еxtеrnаl crеditоrs. Thus, whеn dеciding tо invеst in а раrticulаr cоmраnу, оnе оf thе mаin critеriа is thе lеvеl оf its finаnciаl cоnditiоn. Financial condition indicators reflect the availability, placement and use of financial resources. The position of an enterprise in the field of finance largely determines its competitiveness and potential in business cooperation and assesses to what extent the financial interests of the enterprise and its partners are guaranteed. The financial condition of enterprises is formed in the process of their relationship with suppliers, buyers, tax authorities, banks, and other partners. Their economic prospects depend on the possibility of its improvement. The financial stability of an enterprise becomes a matter of its survival since the bankruptcy of an enterprise in a market environment is a likely result of economic activity along with other opportunities. In this regard, the role and importance of financial analysis both for the enterprise itself and for its various partners increases significantly. It is crucial to find the reasons for abrupt changes in order to maintain the ability to predict further developments and to prevent or mitigate adverse trends in a timely manner. An extensive manifestation of the financial condition of an enterprise is its solvency, which means the ability to timely meet the payment requirements of suppliers in accordance with contracts, to repay loans, pay wages, and make payments to the budget. As a result of the implementation of any business transaction, the financial condition may remain unchanged or worsen or improve. Knowing the limits of change in the volume of certain types of sources of funds to cover capital investments in fixed assets or production stocks allows you to generate such business transactions that lead to an increase in the financial stability of the enterprise. The financial condition of an enterprise reflects the results of its production, commercial and financial activities. If the production and financial plans are successfully fulfilled, this has a positive effect on the financial position of the company. And vice versa, because of the failure to fulfill the plan for the production and sale of products, there is an increase in its cost, a decrease in revenue, as well as in the amount of profit and, as a result, a deterioration in the financial condition of the enterprise and its solvency. Analysis of the financial condition of an enterprise has several goals: X4 - market value of equity to book value of debt (a leverage ratio), X5 - operating revenues to total assets (a turnover ratio). This ratio is a stepwise multiple discriminant regression and was used e.g. by Gritta (1982) in forecasting the insolvency of Braniff International Airways and Continental Airlines, several years before they filed for bankruptcy. Critical values of Altman Model are 1.81 and 2.99 – when the ratio is lower than 1.81, the company may be on the path of bankruptcy, while scoring more than 2.99 translates into a solvency profile. 2) The Altman ZETA Model Zeta = a1X1 + a2X2 + a3X3 + a4X4 + a5X5 + a6X6 + a7X7 where X1 - return on assets, X2 - earnings stability (the deviation around a 10-year trend line of (X1), X3 - debt service, X4 - cumulative profitability (the same as X2 in Z Score) X5 - liquidity (measured by the current ratio) X6 - the ratio of equity to debt (using market values and a 5-year trend), X7 - firm size (measured by the log of the firm’s total assets). This ratio is connected to the previously described method. The author developed its Altman Model by adding variables to the original method in order to increase the predictability. Every result lower than 0 may be considered as a stress situation of the company. 3) The AIRSCORE Model AIRSCORE Model is a specific industrial (aviation) model based on three ratios, as in the formula: significant external and internal environmental changes. Bаnkruрtcу оf аn еntеrрrisе is far more than mere debt collection, which provides the framework for implementing fundamental decisions about how to manage the social and economic consequences of business failure. As it has been stated by Lewis (2018), bankruptcy is a very straightforward process. It typically consists of six steps: 1) liquidation proceedings, 2) reorganization proceedings, 3) the adjustment of debts of an individual with regular income, 4) the adjustment of debts of a family farmer or fisherman with regular annual income, 5) the adjustment of debts of a municipality, 6) ancillary and cross-border cases. Thерrоblеmоffinаnciаlinsоlvеncуоfthееntеrрrisеhа sbеcоmеquitеrеlеvаnt in mаnу cоuntriеs. Hugе mutuаl nоn-рауmеnts, wаgе аrrеаrs - аll this is hарреning nowadays, еsреciаllу during thе раndеmic. Thеу оriginаtе in аn ill-cоncеivеd еcоnоmic strаtеgу fоr thе dеvеlорmеnt оf аn еntеrрrisе in thе cоnditiоns оf mаrkеt rеlаtiоns аnd in thе аbsеncе оf mаnаgеriаl аbilitiеs аt thе mаnаgеmеnt lеvеl (Kuznetsov et al., 2015). Models most commonly used in the literature to assess financial stress and predict bankruptcy well in advance of the event in case of airlines (Gritta et al., 2008): 1) The Altman Model Z = 0.012X1 + 0.014X2 + 0.033X3 + 0.006X4 + 0.999X5 where X1 - net working capital to total assets (a liquidity ratio), X2 - retained earnings to total assets (a profitability ratio), X3 - operating profit to total assets (a profitability ratio), the balance sheet currency. After making calculations, the balance sheet is recommended to be verified with real forecasts. In addition, it is advisable to compare the change in the total volume of property for the reporting periods (year, quarter) with the data of the results of economic activity. Following, the financial stability analysis is performed. Such a check provides understanding of whether the company has financial independence, whether it can maneuver its own capital and provide support for the production process without attracting borrowed funds. Sustainability analysis enables external investors to assess the company's prospects and its reliability. If the result is positive, it allows the company to get the necessary infusions faster. Respectively, the solvency analysis consists in checking the company's ability to fulfill its obligations. Such an analysis is often called a liquidity test, that is, an assessment of the company's ability to convert its assets into real capital to meet its liabilities. The main reasons for low liquidity include errors in financial and economic activities, the presence of accounts receivable, problems with capital turnover, and so on. Finally, the business activity analysis is conducted as an opportunity to be convinced of the rational use of personal funds by the company. The main indicators include the main parameters of turnover. The higher the rate of turnover of funds in monetary form, the greater the potential of the company. The main result of the calculations is the calculation of the turnover ratio (Morozova & Tikhonova, 2002). The analysis of profitability ratios is carried out by studying the historical dynamics of change, direction, and rate. Profitability ratios are the main indicators characterizing the profitability of an enterprise and the effectiveness of its various elements. Profitability indicators are relative indicators, that is, they represent the ratio of income items to types of activities, sales volumes, property size, etc. In the process of analyzing the financial and economic activities of the enterprise, it is necessary to study the composition, structure, and dynamics of several indicators (assets and liabilities of the balance sheet, income, expenses, profit, etc.). The absolute change in indicators is calculated by the formula: ΔPi = P2 - P1 AIRSCORE = -.34140X1 = .00003X2 + .36134X3 where X1 – interest/total liabilities, X2 – operating revenue per air mile, X3 – shareholders’ equity/total liabilities. The conception of both economic growth and crisis are two complementary sides of the same coin. They are part of a broader theory of the reproduction in time of society. From the type of explanation of economic growth, it logically follows an explanatory theory of the reasons why the crisis occurs. Or expressed alternatively, an analysis of the crisis has implicitly not only a conception of economic growth, but of systemic reproduction, and thus, of the capitalist regime itself. The relevance of the concept of economic crisis is revealed by the fact that the theory of crisis establishes a division of the various schools of economic thought. And by extension, it supports the corresponding economic policy recommendations. Аccоrding tо Tome (2019), the crisis expresses the contradiction between the development of the productive forces and the social relations of production. In other words, it is the contradiction between use value and exchange value. This abstract tendency toward the crisis is theorized within the framework of ideal conditions: assuming that there is full physical availability of all kinds of goods and services, considering that any element susceptible to correction or improvement by the institutional framework has already been incorporated, the existence of a certain degree of human rationality, and that changes in prices respond to changes in production conditions. On the other hand, the explanation of the crisis requires integrating both levels: content and form, the essential and its way of manifesting the abstract and the concrete. The financial analysis consists of several stages. First, it estimates the dynamics of the balance sheet currency. At this stage, the state is assessed based on accounting reports. In this case, the totals will be called the balance sheet currency. After making calculations, The balance is considered absolutely liquid if the following ratios take place: A1 > P1; A2 > P2; A3 ≥ P3; A4 ≤ P4 The fulfillment of the first three inequalities necessarily entails the fulfillment of the fourth inequality, therefore, it is practically essential to compare the results of the first three groups in terms of assets and liabilities. In the case where one or several inequalities have a sign opposite to that fixed in the optimal version, the liquidity of the balance to a greater or lesser extent differs from the absolute one. There are four main types of financial strength: absolute financial stability, normal financial stability, unstable financial position, and crisis financial situation. Absolute financial stability arises when an enterprise fully covers the need for commodity and production values from the account of own resources. In this case, the company covers its costs with its own funds and does not depend on creditors. It is worth noting that this type of financial stability is rarely found, and mainly in small firms in terms of production and turnover. This financial stability can be described by the formula: M1 = (1, 1, 1): ΔOCA > 0, ALS > 0, ΔACR > 0 where ∆ОСA - decrease (increase) of own circulating assets, ∆ALS - increase (decrease) in the number of long-term sources of financing and own funds, ∆SCR - an increase (decrease) in the total value of the main source of coverage of reserves. Normal (sufficient) financial stability arises when a firm finances its costs through long-term loans and its own funds. With this type of financial stability, the maximum efficiency of production activities is achieved. Normal financial stability is expressed by the formula: M2 = (0, 1, 1): ΔOCA < 0, ALS > 0, ΔSCR > 0 where ΔPithe absolute change in the indicator, P2 - value at the end of the year, P1value at the beginning of the year. Analyzing the dynamic range of absolute changes in indicators, we determine the direction of development (growth, decline). Relative change: TnPi = (P2)/P1 * 100 where TpPi - the rate of growth of the indicator. The growth rate shows the percentage change of the compared level to the base or previous level of a few dynamics and allows us to determine the direction and nature of the relative change in the indicator. To analyze the liquidity of the balance sheet depending on the degree of liquidity, i.e., the speed of transformation into cash, the assets of the enterprise can be divided into the following groups: A1. Enterprise cash and short-term financial investments. A2. Receivables. A3. Inventories, value added tax and other current assets. A4. Long-term assets. Balance sheet liabilities are grouped according to the urgency of their payment: P1. Accounts payable. P2. Short-term borrowed funds and other short-term obligations. P3. Long-term loans and borrowed funds, arrears of income to participants, deferred income and reserves for future expenses. P4. Equity capital. To determine the liquidity of the balance sheet, it is necessary to compare the results of the given groups by asset and liability. It shows what part of short-term liabilities can be repaid at the expense of available cash, the higher its value, the greater the guarantee of debt repayment. The overall picture of the company's solvency is supplemented by the presence or absence of overdue obligations, their frequency and duration. Quick ratio is the ratio of cash, short-term financial investments and short-term receivables, payments for which are expected within 12 months after reporting date, to the amount of short-term financial liabilities. Usually the ratio of 0.7 - 1 is satisfied. However, it may turn out to be insufficient if a large share of liquid funds is accounts receivable, some of which are difficult to collect in a timely manner. In such cases, a larger ratio is required. Overall liquidity ratio: L1 = (A1 + 0.5 * A2 + 0.3 * A3)/(P1 +0.5 * P2 +0.3) where L1the absolute liquidity ratio. It quantifies the ability of an enterprise to pay short-term liabilities on time using available current assets. The level of this coefficient should be > 1. Absolute liquidity ratio: L2 = (LF + SFI)/SL where L2 - the absolute liquidity ratio, LF - long-term funds, SFI-short-term financial investments, SL - short-term liabilities. This shows what part of short-term debt the organization can pay off in the near future at the expense of cash. The level of this coefficient should be > 0.20.7. Current liquidity ratio (total debt coverage ratio) - the ratio of the total amount of current assets, including inventories and work in progress, to the total amount of short-term liabilities. It shows the extent to which current assets cover current liabilities: An unstable financial position occurs when an enterprise cannot cover its costs with its own funds and long-term loans and is forced to resort to short-term loans for production activities. For example, if a firm cannot acquire materials, for the continuity of the production cycle, and is forced to turn to borrowed funds (short-term loans, accounts payable) for their purchase, then such a company is in an unstable position. This situation may arise if the rate of conversion of the invested assets into real money (operating cycle) has slowed down. It is worth noting that such a financial situation quite often occurs in firms and does not always lead to the collapse of the firm. At this stage, competent financial management, mobilization of assets and reserves should be a priority for the management. The precarious financial situation is expressed by the formula: M3 = (0, 0, 1): ΔOCA < 0, ALS < 0, ΔSCR > 0 A financial crisis occurs when a firm has exhausted all possible sources of funding and is unable to pay for its obligations. In this case, the company expects bankruptcy or reorganization. A crisis state is described by the following formula: M4 = (0, 0, 0): ΔOCA < 0, ALS < 0, ΔSCR < 0 Further, the ratio analysis of liquidity and solvency is carried out. The solvency of the organization is characterized by liquidity ratios, which are calculated as the ratio of various types of working capital to the amount of urgent liabilities. Each type of working capital has its own liquidity, and liquidity ratios show what part of short-term liabilities the organization can repay if specific types of working capital are converted into money. There are the following liquidity ratios that characterize solvency, which are of interest not only to the management of the enterprise, but also to external subjects of analysis: the absolute liquidity ratio is of interest to suppliers of raw materials and materials, the quick liquidity ratio is for banks, and the current liquidity ratio is for investors. The absolute liquidity ratio is determined by the ratio of cash and short-term financial investments to the total amount of short-term debts of the enterprise. istrative expenses decreased by 0.37%.The share of gross profit increased from 0.99% to 1.59%, due to an increase in the share of prime cost. The share of profit from sales decreased from 7.65% to 6.67%, due to an increase in the share of selling costs. The share of profit before tax decreased from 0.81% to 0.42%. Net profit in 2019 amounted to 5,286,800 thousand rubles (Figure 1 and 2). The statement of financial results provides an assessment of the efficiency of the enterprise and is necessary for the analysis of profitability and business activity. The share of the cost of goods sold amounted to 98.41%.In 2019, selling and administrative expenses in the revenue structure amounted to 5.89% and 2.37%. Compared to the previous period, the share of production costs decreased by 0.6%, and the share of selling expenses decreased by 0.02%, and the share of adminFigure 1: Assets of Aeroflot airlines in years 2018-2020 (in thousand rubles) Source: Aeroflot – Auditor’s report https://ir.aeroflot.ru/fileadmin/user_upload/files/rus/reports/rsbu/2020/ ras_12m2020.pdf(Access: 28.06.2021). In the three consecutive years Aeroflot’s assets have been increasing and the much more significant increase can be observed between 2019 and 2020. Generally, increase in assets may be interpreted as a company’s growth, which is of no surprise in the aviation sector – the tendencies have highlighted constant expansion of the market up until March 2020. 38 612 725 36 795 771 70 330 938 Figure 2: Sales revenue, cost price and sales profit of Aeroflot in years 2018-2020 (in thousand rubles) 499 683 382 542 976 396 177 575 918 504 696 789 551 767 420 229 766 365 Source: Aeroflot – Auditor’s report https://ir.aeroflot.ru/fileadmin/user_upload/files/rus/reports/rsbu/2020/ ras_12m2020.pdf(Access: 28.06.2021). the same time does not depend on borrowed funds. A visual representation of this relationship is shown in Figure 3. The main criterion for assessing financial stability is the ratio of own funds to borrowed funds. And here a certain balance should be maintained, in which the enterprise can work as efficiently as possible, but at Figure 3: Equity to debt ratio in years 2018-2020 Source: Aeroflot – Auditor’s report https://ir.aeroflot.ru/fileadmin/user_upload/files/rus/reports/rsbu/2020/ ras_12m2020.pdf (Access: 26.08.2021). As can be seen from Figure 3, the company in 2021 saw a colossal increase in its borrowed funds. In Table 4 included in the appendix, it can be seen that as of Dec 31, 2020, the organization's assets for the entire period under consideration increased slightly (by 39.73%). Noting this growth in assets, it is necessary to consider that equity capital increased even more - 2.20 times. This low increase in equity capital should be considered a positive factor. In a market environment, any company can go bankrupt, but a skillful economic strategy, rational policy in the field of finance, investments, prices and marketing allow the company to avoid this and maintain business activity, profitability and a high reputation for many years as a reliable partner and manufacturer of quality products or quality services. PJSC Aeroflot is the leader in civil aviation in Russia. The main activity of Aeroflot Group is passenger air transportation. At the end of 2017, the corporation occupied more than 40% of the Russian air transportation market in terms of passenger traffic. At present, PJSC Aeroflot places a special emphasis on new information technologies as a powerful means of improving the quality of customer service. The founder of PJSC Aeroflot is the Government of the Russian Federation, it owns 51.17% of the shares of PJSC Aeroflot, and about 41% belong to legal entities and individuals, including the company's employees. To predict the possible bankruptcy of PJSC Aeroflot, the foreign five-factor model of E. Altman will be used. The initial data required for diagnosing the probability of bankruptcy using the five-factor model for PJSC Aeroflot are presented in Table 5. As a result of the thesis, it was revealed that the financial condition is the most important characteristic of the economic activity of the enterprise. It determines the competitiveness of an enterprise, its potential in business cooperation, and assesses the extent to which the economic interests of the enterprise itself and its partners in financial and other relations are guaranteed. The study showed that solvency and financial stability are the most important characteristics of the financial and economic activity of an enterprise in a market economy. If an enterprise is financially stable, solvent, it has an advantage over other enterprises of the same profile in attracting investments, in obtaining loans, in choosing suppliers and in the selection of qualified personnel. Finally, it does not come into conflict with the state and society, since it pays taxes to the budget, contributes to social funds, pays wages to workers and employees, pays dividends to shareholders on time, and guarantees the return of loans and payment of interest on them to banks. The higher the Aeroflot using a five-factor model: Z2018 = 1.2 * 0.61 + 1.2 * 0.38 + 3.3 * 0.02 + 0.6 * 0.73 + 2.94 = 4.63 Z2019 = 1.2 * 0.63 + 1.2 * 0.34 + 3.3 * 0.01 + 0.6 * 0.67 + 2.77 = 4.37 Z2020 = 1.2 * 0.64 + 1.2 * 0.10 + 3.3 * 0.45 + 0.6 * 0.65 + 0.45 = 0.38 Based on a five-factor E. Altman model, it might be concluded that the company PJSC Aeroflot as of 31.12.2020 was financially not stable, as there is a downward trend in the Z index, which cannot but alert us to the condition. Table 5: Data for calculating the five-factor model Indicator 2018 2019 2020 Current assets, thousand rubles 105 434 016.00 124 624 352.00 173 492 749.00 Amount of assets, thousand rubles 171 651 899.00 198 931 740.00 271 035 127.00 Retained earnings, thousand rubles 65 848 670.00 68 284 001.00 28 200 730.00 Operating profit (profit before tax), thousand rubles 4 082 708.00 2 317 013.00 123 149 777.00 Debt 82 150 336.00 104 635 508.00 81 570 945.00 Market value of shares (share capital), thousand rubles 60 256 178.00 69 726 232.00 53 276 490.00 Revenue, thousand rubles 504 696 789.00 551 767 420.00 121 703 971.00 X1 (ratio of working capital to assets) 0.61 0.63 0.64 X2 (ratio of retained earnings and assets) 0.38 0.34 0.10 X3 (ratio of operating profit and total assets) 0.02 0.01 0.45 X4 (ratio of market value of shares to debt) 0.73 0.67 0.65 X5 (revenue to assets ratio) 2.94 2.77 0.45 Source: Official website of PJSC Aeroflot, https://ir.aeroflot.ru/ru/reporting/annual-reports/(Access: 28.06.2021). rubles. As of 31.12.2019 and 31.12.2018, the authorized capital was 1,110,616,299 rubles. This financial analysis of PJSC Aeroflot based on a five-factor model of E. Altman, may conclude that the company as of 31.12.2020 is financially not stable, and was on a downward trend in the Z index. Such an outcome can be explained by the strongest decline in demand which affected the load and efficiency of the aircraft fleet because of COVID-19. Aircraft which have been in use during the highest demand times had to be leased or grounded for an unspecified amount of time. For the 12 months of 2020, the Group transported 30.2 million passengers, which is 50.3% fewer than the result of the same period in 2019.The percentage of occupancy of passenger seats in the Group decreased by 8.3 p.p. compared to the same period last year and amounted to 73.6%.The Group's passenger turnover decreased by 56.5% compared to the same period last year. The Altman Model results calculated in the study confirmed that Aeroflot is not in a stable position, which could have been observed on the market. The correlation between calculation and observative reality can be considered as a demonstration of the continuous applicability of the Altman Model to assess financial situation and predict future trends. Taking into account that aviation is one of the first sectors which was affected by COVID-19, it is a main reason of why the company is facing such financial issues as of 31.12.2020. It could be considered a temporary challenge. Moreover, not only Aeroflot company, but diverse businesses are struggling and continuing to fight the pandemic in order to survive today. stability of an enterprise, regardless of an unexpected change in market conditions, the less the risk of being on the verge of bankruptcy. For Aeroflot, as of December 31, 2020, the residual value of fixed assets amounted to 7,140,577 thousand rubles. Decrease in the indicator in "Fixed assets" in 2020 was in the amount of 1 310 979 thousand rubles or 15.51%. As of December 31, 2020, the residual value of profitable investments in tangible assets amounted to 721,487 thousand rubles (as of 31.12.2019 - 756 791 thousand rubles, as of 31.12.2018 - 522 530 thousand rubles). Decrease in the indicator "Profitable investments in material assets" in 2020 was in the amount of 35 304 thousand rubles or by 4.66%. As of December 31, 2020, capital investments in fixed assets amounted to 4,371,978 thousand rubles (as of 31.12.2019 - 3,894,521 thousand rubles, as of 31.12.2018 - 3,799,813 thousand rubles). Increase in capital investments in fixed assets in 2020 was in the amount of 477,457 thousand rubles. or 12.26%. Increase in the value of fixed assets in 2020 was by 80,982 thousand rubles. 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(2004).Analysis and Diagnostics of the Financial and Economic Activities of the Enterprise. https://search.rsl.ru/ru/record/01002437662(Access: 14.11.2021). https://www.aeroflot.ru/ (Access: 13.11.2021). https://ir.aeroflot.ru/fileadmin/user_upload/files/rus/reports/annual_reports/ar2020_rus.pdf(Access: 13.11.2021). Table 4: Property structure and sources of its formation Index Indicator value In % to the balance currency Change for the analyzed period Active 2018 2019 2020 31.12.18 31.12.20 thousand roubles ± % 1. Noncurrent assets 74 307 388 97 542 378 - 26.46 97 542 378 fixed assets 13 031 367 12 346 077 11 512 514 7.59 3.12 (1 518 853) 0.88 intangible assets 40 946 543 413 486 263 0.02 0.13 445 317 11.88 2. Negotiable, total 171 651 899 198 931 740 271 035 127 100.00 73.54 99 383 228 1.58 reserves 9 363 819 10 204 179 13 226 345 5.46 3.59 3 862 526 1.41 accounts receivable 82 150 336 104 635 508 81 570 945 47.86 22.13 (579 391) 0.99 cash and short-term financial investments 9 871 604 7 481 583 76 249 435 5.75 20.69 66 377 831 7.72 Passive 1. Equity capital 1 110 616 1 110 616 2 444 535 0.65 0.66 1 333 919 2.20 2. Long-term liabilities, total 7 883 777 9 409 138 76 974 173 4.59 20.88 69 090 396 9.76 borrowed funds 6 918 282 7 570 486 22 826 243 4.03 6.19 15 907 961 3.30 3. Current liabilities, total 103 511 944 119 796 370 271 035 127 60.30 73.54 167 523 183 borrowed funds 12 524 022 25 536 113 - 6.93 25 536 113 Balancecurre ncy 171 651 899 273 239 128 368 577 505 100.00 100.00 447 362 230 39.73 Source: Aeroflot – Auditor’s report https://ir.aeroflot.ru/fileadmin/user_upload/files/rus/reports/rsbu/2020/ ras_12m2020.pdf(Access: 26.08.2021).