Golden Rules of Financing Related to the Life Cycle of Czech Automotive Firms
Konečný Zdeněk
Keywords:
capital providers, corporate life cycle, financial risk, financial sources, golden rules of financing
Abstract:
Companies go through their life cycle and it is only possible to moderate but not completely
eliminate the switchover from one phase to another. Each phase is connected with different
financial results as a consequence of financial conditions and financial decisions. The aim of this
article is to find out whether the golden rules of financing are (or are not) respected, dependent
on financial strategy, in sub-phases of the corporate life cycle. It is caused by the fact that the
golden rules are indicators of the rate of financial risk and some providers can consider their
respecting by deciding to lend capital. However, golden rules of financing are not set strictly
and therefore the comparison with market averages is necessary. The research is implemented
by analyzing secondary data from financial statements and documents of the Ministry of Industry
and Trade of the Czech Republic for years from 2007 to 2011. The sample consists of
43 companies limited by guarantee and joint-stock companies, regardless their size, acting in
the Czech automotive industry. Phases of the corporate life cycle are identified according to the
model by Dickinson (2010) based on combinations of cash flow values. The research showed
that the golden rule of risk compensation is respected especially during maturity, whilst during
introduction it is broken and on the market this rule is not respected either. Almost in all companies,
regardless the phase, as well as on the whole market are long-term assets financed with
long-term sources. During maturity, shake-out and decline the recommended liquidity of the
second level is reached, but not the liquidity of the third level, whereas during the introduction
and growth is not reached the recommended liquidity of any levels. The market is characterized
with a sufficient liquidity of the second and insufficient liquidity of the third level. A surprising
finding is that the golden ratio rule is, in most periods, respected on the market, but not in many
companies in any phases.
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10.7441/joc.2013.02.06
Konečný Z. (2013). Golden Rules of Financing Related to the Life Cycle of Czech Automotive Firms. Journal of Competitiveness, 5 (2), 83-97 https://doi.org/10.7441/joc.2013.02.06
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