Risk Assessment : Case of „ Lietuvos Geležinkeliai “ , AB

This research paper focuses on the analysis of the financial risk of Lietuvos geležinkeliai, AB (eng. Lithuanian Railways), which activities are passenger and freight transportation by rail. In order to assess the financial risk of the leading company areas of financial risk were identified and are as follows: liquidity risk, credit risk and market risk. However, due to limited access to statistics only financial report of the organisation were analysed and, hence, just liquidity and credit risk were investigated. Consequently, the limitation of the current research is that only two categories of financial risk were analysed. For the purpose of financial risk analysis, the key indicators of liquidity and credit risk were distinguished from the literature. The results showed that the biggest problem of the company is too small short-term assets and the profitability indicators, which were strongly influenced by net profit (loss).


Introduction
All profit-making organisations experience different types of risks. One of such threats is a financial risk. Hence, it is necessary to analyse the risk in order to manage it correctly. Actually, within the right management, the financial risk could be lowered which, according to Blatt and Gulbin (2018), could increase the liquidity of an organisation. Because of that, the analysis is the method that helps to choose the write management direction.
The purpose of the current research is to analyse the financial risk of one of the largest Lithuanian companies -Lietuvos geležinkeliai, AB (eng. Lithuanian Railways) and assess the overall for its financial risk. The primary activity of the company is passenger and freight transportation by rail; consequently, financial risk is the one which the company experience in everyday activity while dealing with people (passengers) and business companies. Hence, the aim of the study is to analyse the financial risk of Lietuvos geležinkeliai. Moreover, there is a lack of studies dealing with the assessing companies whose owner is the Republic of Lithuania. It is crucial to research the risks of such companies as it is a big part of the country's economic activities that have an impact on the overall country's financial well-being.
In the current paper, the key indicators of financial risk are distinguished. The indicators are identified in order to analyse the financial risk of large organisations such as Lietuvos geležinkeliai and could be used for organisations' financial risk assessment not only in Lithuania but also in other European countries.
The paper is divided into three main parts. The first part is dedicated to the literature review, where the financial risk of a company is defined, and the necessity of its evaluation is discussed. In the second, Table 1. Key indicators of liquidity (short-term solvency) (Source: compiled by authors, based on Bartkauskaitė, Stankevičienė, and Miečinskienė, 2016;Blach, 2010;Dedova, Malakhov, and Pilnik, 2017;NASDAQ, 2010;Silva and Loebel, 2016) Indicator

Formula Interpretation Recommended Value
Current liquidity (general short-term solvency) ratio Short-term assets Short-term liabilities The indicator shows to what extent short-term assets cover short-term liabilities.
The value of this indicator should be 1.2 -2 (times).
Critical liquidity (rapid short-term solvency) ratio Short-term assets-Stocks Short-term liabilities This indicator is a more rigorous assessment of the organization's liquidity since it is assumed that stocks are illiquid. It shows every one euro of short-term liabilities, available assets that can be quickly sold.
The value of this indicator should be ~ 1. Less than 0.5 value is considered unsatisfactory.
Absolute liquidity (short-term solvency) indicator Money and money equivalents Short-term liabilities The indicator shows how much of the short-term liabilities a company can quickly cover in cash.
There are no very strict norms for this indicator. In certain cases, it has been established that the indicator should not be less than 0.2. A high value of the indicator can mean poor financial and cash flow management.
Short-term indebtedness ratio

Short-term liabilities Total Assets
The indicator shows which part of the organization's total assets are financed by short-term debts.
Estimated well if the indicator is 0.2-0.4. The higher the debt component of long-term debt, the lower the risk.
Net working capital Short-term assets-Short-term liabilities The indicator shows the difference between short-term assets and short-term liabilities.
An excessively high indicator means the inefficient use of resources and low solvency problems. Negative size of working capital is not tolerable in the company's activities.
The ratio of net working capital total assets

Networking capital Total Assets
The indicator shows the size of the net investment in liquid assets less short-term liabilities as compared to the company's total investment in total assets.
A higher indicator indicates a higher level of the company's liquidity.
After analysing the company's liquidity risk, it would be further expedient to provide an analysis of the second financial risk group -credit risk. This is useful since, in the assessment of each financial risk group, a more precise summary of the overall financial risk can be provided.

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V. Skvarciany, L. Germanaitė The indicator shows how much debt falls on one equity capital euro The higher the debt capital compared to equity, the greater the financial risk. The higher the indicator, the more complicated the company's situation. If the indicator is less than or equal to 0.3, it is assessed very well, if the indicator is not higher than 0.7, it is assessed well. If the indicator is greater than 1, it means that liabilities are greater than equity capital.

Asset turnover Sales revenue Total Assets
The indicator shows how much sales fall on one total assets euro.
If the asset turnover is > 2 (manufacturing companies) and > 5 (trading companies), then the asset turnover is assessed very well, if the asset turnover is equal to 1 (manufacturing companies) and 3 (trading companies), then the asset turnover is assessed satisfactorily.
Indebtedness ratio (total debt ratio)

Total liabilities Total assets
The indicator shows how much of the borrowed funds are used to build the total assets of the organization.
This indicator is important for creditors, the higher this indicator, the lower the level of security. It is recommended that this indicator is between 0.4 and 0.7.

Return on assets Net profit ×1
Total Assets The indicator shows how much of net profit falls on one assets euro. Reveals what part of the asset returns as a profit.
It is argued that if the profitability of assets is about 20%, then it is a good indicator, if about 15% -then it is a good indicator, if < 8%, then the profitability of the asset is satisfactory. It is necessary to compare the organizations operating in the same branches among themselves.
The ratio of equity capital to total assets

Equity capital Total Assets
The indicator shows the part of total assets constituting of equity capital.
If the ratio is 1: 2, the ratio of equity to total assets is considered to be normal. Approximately half of the financial resources may be lent.

Return on equity capital
Net profit ×100 Equity capital The indicator shows how much profit falls on each monetary unit of the owner that the owner has invested in the company and shows the company's operating efficiency.
If > 20% -it is a good indicator, if <10% then unsatisfactory. For foreign investors in Lithuania-25-30%. The companies of the same branch should be compared. Lietuvos geležinkeliai annual target profitability of equity capital is 5.5 %.

Net profit margin
Net profit ×100 Sales revenue The indicator shows how much the net euro is earned by one euro of sales revenue.
The ratio of Retained Earning to total assets

Retained Earnings
Total Assets The indicator shows what part of the asset consists of retained earnings.
The higher the indicator, the more retained earnings compared to the company's total assets.
The ratio of net working capital to income Networking capital Sales revenue The indicator shows the part of sales revenue constituting of working capital.
The higher the indicator, the more working capital compared to the company's income.

Indicator Formula Interpretation Recommended Value
Gross profit margin Gross profit ×100 Sales revenue The indicator shows how much gross profit falls on one sale euro.
An appropriate value is considered when the gross profitability is 10 -35 % The ratio of short-term to total assets Short-term assets Total Assets The indicator shows the part of total assets constituting of short-term assets.
The higher the indicator, the larger part of total assets consists of short-term assets.
The ratio of cash to total assets Cash Total Assets The indicator shows the part of total assets made up of cash.
The higher the indicator, the larger part of total assets consists of cash.

Empirical Findings
As already mentioned in the methodological part when assessing one of the main financial risk groups of Lietuvos geležinkeliai liquidity risk, the following six financial indicators of the company are calculated: -current ratio, -quick ratio, -cash ratio, -current debt to total assets, -the ration of networking capital to total assets, -net working capital. term liabilities. The company should increase its short-term assets in order to improve the current liquidity (general short-term solvency) indicator. The critical liquidity (rapid short-term solvency) ratio of Lietuvos geležinkeliai only in 2009 and 2012-2013 did not meet the recommendations, but in the aforementioned year, it did not deviate much from the recommended value (0.5 times). The highest value of this indicator was recorded in 2007 -0.741 times, and the lowest in 2012 -0.418 times.
The absolute liquidity (short-term solvency) in cash indicator of Lietuvos geležinkeliai in 2008-2009 and 2015-2018 did not meet the recommended value (at least 0.2 times), which means that in these years the company's cash was an insufficient part of the available short-term assets. The lowest value of this indicator was recorded in 2009 -0.081 times, and the highest in 2014 -0.265 times.
In the period of 2007-2017, the short-term indebtedness ratio of Lietuvos geležinkeliai corresponded to the recommended values (0.2-0.4 times), the highest short-term indebtedness ratio was in 2008 -0.13 times, and the lowest in 2015 -0.04 times, which shows lower risk, because the higher part of debts consists of long-term debts, the lower the risk.
The ratio of net working capital to total assets in the period of 2007-2017 only in 2007, 2015 and June 2017 was positive, which determined the values of net working capital, which were positive namely in these years. In all other years, the ratio of net working capital to total assets of the company did not meet the requirements, the negative indicator indicates the solvency problems of the company, as the short-term indebtedness ratio does not exceed the recommended value, and therefore the company should increase its short-term assets.
After examining five company liquidity indicators, changes in net working capital of the company in the period of 2007-2017 are presented (see Fig. 2). Based on these data, it can be argued that the company's short-term liabilities far exceed the company's short-term assets. The company should increase its short-term assets in order to improve this indicator.
In assessing the credit risk of Lietuvos geležinkeliai 15 indicators are calculated: current liquidity ratio, debt and equity ratio, asset turnover, the ratio of net working capital to total assets, indebtedness ratio, return on assets, the ratio of equity capital to total assets, return on equity capital, critical liquidity ratio, net profit margin, the ratio of retained earnings to total assets, the ratio of net working capital to income, gross profit margin, the ratio of short-term to total assets, the ratio of cash to total assets. Since in assessing the liquidity risk, the current liquidity ratio, the critical liquidity ratio and the ratio of net working capital to total assets were calculated and described, these indicators are not commented in the assessment of the credit risk, all other indicators are calculated on the basis of the formulas 7-18, commented on the basis of recommendations (see Table 2), the company's financial indicators required for calculations (see Appendix) are used from the annual reports of Lietuvos geležinkeliai for 2007-2017. The following are the profitability indicators of Lietuvos geležinkeliai, which help to assess the credit risk (see Fig. 3).
Based on Fig. 3, it can be argued that the gross profit margin of Lietuvos geležinkeliai always met the recommended value (10-35 %). The highest gross profit was recorded in 2007, 21.5 %, and the lowest in 2009, 11.9 %. The highest net profit margin in the period of 2007-2017 was in 2007, 9.5 %, and the lowest in June 2017, -2,1 %, but it should be taken into account that the data of 2017 is only for a half a year, the lowest annual net profit margin recorded was -0.4 %. It is also seen that the company's net profit margin has been steadily decreasing since 2011, since 2014 it did not meet the recommended value (when the indicator is less than 5%, not satisfactory), and from negative since 2016, which is badly assessed. This result was driven by declining sales revenue and net profit, which has been negative since 2016. Profitability of own capital during the analysed period complied with recommendations in the analysed period only in 2007 (5.5%), did not meet the recommendations in the following years, since 2016, the profitability of equity capital has been negative, it was caused by net loss. The highest return on equity capital was recorded in 2007, -6.4 %, the lowest -in June 2017, -0.4, but it should be taken into account that the data of 2017 is only for a half a year, the lowest annual return on equity capital was recorded in 2016, -0.2. The largest return on assets of the company was in 2007, 4.1 %, and the lowest in June 2017, 0.21, but it should be taken into account that the data of 2017 is only for a half a year, the lowest annual return on assets was in 2016, -0.1. It is also seen that the return on assets since 2016 is negative, caused by the net loss. To sum up, it can be argued that only the gross profit margin met the recommended values throughout the analysed period. It is also possible to say that the negative changes in profitability indicators were strongly influenced by net profit, which has been negative since 2016. The economic downturn in Lithuania and neighbouring countries, in particular, the decrease in freight volumes (especially in Kaliningrad direction), was the main negative impact on its activities. What is more, the negative net profit was due to lower sales revenue, their decrease was influenced by a decrease in cargo transportation volumes, structural changes in cargo transportation, decreasing volumes of additional services related to freight transport activities, as well as negative results were affected by a fine for restricting competition by using the market situation. Return on Assets 4,1 2,7 0,3 1,5 3 2,4 1,6 1 0,1 -0,1 -2,1 Return on equity 6,4 4,9 0,6 2,5 5,4 4,8 2,8 2 0,3 -0,2 -0,4 Net profit margin 9,5 6,9 1,1 4,8 9,1 7,5 6,2 4,4 0,6 -0,4 -2,1 Gross profit margin 21,5 17,9 11,9 16,4 20,2 17,4 16,5 16,6 15,4  The following are the indicators of the capital structure of Lietuvos geležinkeliai (see Fig. 4).

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V. Skvarciany, L. Germanaitė Return on Assets 4,1 2,7 0,3 1,5 3 2,4 1,6 1 0,1 -0,1 -2,1 Return on equity 6,4 4,9 0,6 2,5 5,4 4,8 2,8 2 0,3 -0,2 -0,4 Net profit margin 9,5 6,9 1,1 4,8 9,1 7,5 6,2 4,4 0,6 -0,4 -2,1 Gross profit margin 21,5 17,9 11,9 16,4 20,2 17,4 16,5 16,6 15,4 15,1 12,3 2007 2008 2009  According to Figure 4, it can be stated that the ratio of equity capital to total assets of Lietuvos geležinkeliai in the period of 2007-2017 slightly exceeded the recommended rate (0.5 times) in 2007, 2010, 2011 and 2013, which means that in the aforementioned years, slightly more than half of the financial sources were lend, this means a higher risk. The debt and equity ratio is consistent with the recommendations (if the indicator is not more than 0.7 times, well assessed), this means that the liabilities of the company do not exceed the equity capital, which means less financial risk. The largest debt and equity ratio were in 2014,0.43 times, and the lowest in 2007, 0.26. The company's debt ratio over the analysed period was in line with the recommended values (not more than 0.7), which is very good, because this indicator is extremely important for creditors, the higher the indicator, the lower the level of security. The highest indebtedness ratio was recorded in 2008, 0.23 times, and the lowest in 2007, 0.16 times. In summary, the capital structure indicators of the analysed company usually met the recommended values, and if there were any discrepancies, they were minimal, which means that the company effectively manages its capital, is more reliable for creditors. Other financial indicators of Lietuvos geležinkeliai are presented below (see Fig. 5). 4,1 2,7 0,3 1,5 3 2,4 1,6 1 0,1 -0,1 -2,1 Return on equity 6,4 4,9 0,6 2,5 5,4 4,8 2,8 2 0,3 -0,2 -0,4 Net profit margin 9,5 6,9 1,1 4,8 9,1 7,5 6,2 4,4 0,6 -0,4 -2,1 Gross profit margin 21,5 17,9 11,9 16,4 20,2 17,4 16,5 16,6 15,4  Based on Fig. 5, it can be seen that the ratio of short-term to total assets of Lietuvos geležinkeliai in the period of 2007-2017 was extremely low, which means that the company's short-term assets, throughout the Financial Risk Assessment: Case of "Lietuvos Geležinkeliai", AB 27 years, except for 2007 (in 2007 it was 10 %), accounted for less than 10 % of total assets, which means that the company holds the largest part of its assets in fixed assets, which may mean the company's financial liquidity problem. The ratio of retained earnings to total assets during the analysed period was the highest in 2007, 0.04 times, and the lowest in June 2017, 0.03, however, it is necessary to assess the fact that the data of 2017 is only for a half a year, the lowest annual ratio of retained earnings to total assets was in 2016, -0.01. This indicator has been negative since 2016, due to the company's net loss. Also in the analysed period, the ration of retained earnings to total assets was below 0.1, which means that the retained earnings during the analysed period did not exceed 10 % of the total assets. The ratio of cash to total assets during the analysed period was below 0.1, which means that the cash represented no more than 10 % of the total assets. The highest value of the indicator was in 2007, 0.021 times, and the lowest in 2009 and 2015, 0.004 times. The ratio of net working capital to income during the analysed period almost always, except for 2007, 2015 and June 2017, was negative, the indicator was negative due to negative net working capital. To summarize, these indicators are more difficult to assess because they do not specify specific numerical values, but it can be argued that the negative ratio of net working capital to income and the ratio of short-term to total assets indicate a small value of the company's short-term assets, which means the problem of the company's financial liquidity. The ratio of cash to total assets indicates that a very small part of the assets in cash, which may mean the problem of the company's financial liquidity.
Below is the asset turnover of Lietuvos geležinkeliai (see Fig. 6). The ratio of networking capital to income 0,024 -0,108 -0,124 -0,035 -0,009 -0,058 -0,106 -0,03 0,014 -0,025 0,018 The ratio of short-term to total assets 0,1 0,08 0,07 0,07 0,08 0,07 0,06 0,06 0,05 0,05 0,05 The ratio of cash to assets 0 According to Fig. 6, it can be seen that the asset turnover of Lietuvos geležinkeliai in the period 2007-2017 did not meet the recommendations; it did not even reach three, which is badly assessed. A low asset turnover indicator indicates insufficient sales revenue, so the company should increase its sales revenue in order to improve its asset turnover. The largest asset turnover was in 2007, 0.43 times, and the lowest was in 2017, 0.1 times, but it is necessary to assess the fact that the data of 2017 is only for a half a year, the lowest annual asset turnover was in 2016, 0.2 times.

Conclusions
Summarizing the liquidity risk assessment of Lietuvos geležinkeliai, it can be argued that the biggest problem of the company is too small short-term assets, which was shown by the current liquidity (general short-term solvency) ratio of the company, which the analysed period never met the recommended values; the networking capital indicator, which was positive only three times during the analysed period. The shortterm indebtedness ratio showed that the company's short-term liabilities are not too high, so the company should increase the short-term assets in order to increase financial liquidity.
Summing up the company's credit risk, it can be argued that the company's biggest problem is the profitability indicators, which were strongly influenced by net profit (loss). It can also be argued that the problem of the company is the too small quantity of the short-term asset, as well as insufficient sales volumes. In order to look more attractive to creditors, the company should increase short-term assets, cash and sales revenue, which would have an impact on net profit growth, which also means improving profitability indicators. The results might contribute to the activities carried out by the Government of Lithuania in managing the performance of Lietuvos geležinkeliai, AB and could show the directions of financial risk assessment which, in turn, provides the guidelines in planning the strategy for further risk management.
However, there is a limitation of the research. In the current study, only financial risk indicators are analysed. The limitations provide further research direction -evaluating of other risks of the activities of Lietuvos geležinkeliai, AB. The risks that could be analysed in the future are as follows: strategic risk, reputational risk, compliance risk, operational risk. Since all the risks are evaluated, the model of risk management could be designed.