CONTENT
1)LIQUIDITY AND WORKING CAPITAL
2)OPERATING ACTIVITY ANALYSIS OF LIQUIDITY
3)ADDITIONAL LIQUIDITY MEASURES
PART I:
Liquidity and Working Capital
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LIQUIDTY
Ability to convert assets into cash or to obtain cash to
meet short-term obligations.
Short-term - Conventionally viewed as a period up
to one year.
Lack of liquidity can limit:
- Advantages of discounts
- Profitable opportunities
- Management actions
- Coverage of current obligations
Working Capital
1) Widely used measure of liquidity.
2) The excess of current assets over current liabilities.
3) Important due to following:a) As a measure of liquid assets that provide a safety
cushion to creditors
b) For measuring the liquid reserve available to meet
contingencies and the uncertainties surrounding a
companys balance of cash inflows and outflows.
CURRENT ASSETS
Cash and other assets
reasonably expected to
be :(1)realized in cash, or
(1)sold or consumed, during
the longer of one-year or
the operating cycle.
CURRENT LIABILITIES
Obligations expected to be
satisfied within a relatively
short period, usually a year.
TYPES
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PART II:
Operating Activity Analysis of
Liquidity
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Example:
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Example:
(Days Sales in Inventory)
Financial information from Macon Resources for Year 8:
Sales. $1800000
Cost of Goods Sold $1200000
Beginning inventory.... $200000
Ending inventory. $400000
Days Sales in Inventory
= Inventories / Cost of Goods Sold
360
=
400000
$1200000/360
=
120 days#
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Interpreting Inventory
Turnover
Quality of inventory: refer to a companys ability to use and dispose of
inventory. (basically company does not use inventory for paying
current liabilities cuts into sales volume)
Decreasing inventory turnover
Analyze if decrease is due to inventory build up in anticipation of
sales increases, contractual commitments, increasing prices,
work stoppages, inventory shortages, or other legitimate reason.
Effective inventory management increases inventory turnover.
Conversion period or
operating cycle where
combines the collection of
receivables with the days to
sell inventories to obtain the
time interval to convert
inventories to cash.
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PART III:
Additional Liquidity Measures
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Example :
Financial Flexibility
- Ability to take steps to counter unexpected interruptions in the flow of
To borrow from various sources
To raise equity capital
To sell and redeploy assets
To adjust the direction level of operations
funds
Basics of Solvency
Solvency long run financial viability and its ability to cover long
term obligation
Capital Structure Financing sources and their attribute
Earning Power Recurring ability to generate income from
operation
Loan Covenants Protection against insolvency and financial
distress
Capital Structure
Equity financing
Risk capital of a company
Uncertain and unspecified return
Lack of any repayment pattern
Contributes to a companys stability
and solvency
Debt financing
Must be repaid with interest
Specified repayment pattern
Basics of Solvency
Capital Structure Ratio:
Basics of Solvency
Earning Power:
Earnings power measures provide insight into the ability of a
company to meet its fixed charges
High correlation between earnings-power measures and default
rate on debt
Earnings variability and persistence is important
Use earnings before discontinued operations, extraordinary
items, and cumulative effects of accounting changes for single
year analysis but, include them in computing the average
coverage ratio over several years
Basics of Solvency
Basics of Solvency
THANK YOU
12/17/15