Date post: | 27-Dec-2015 |
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Importance of short-term Liquidity
• Definition: The ability to cover short-term debt
• Interests shareholders & creditors• Taking advantage of market
opportunities• Static vs. dynamic view• Reverse relation to Return
Current Ratio value
• Normal spread 1-2
• average 1,5
• Current ratio relates to:sectorBusiness life cycle Business organizationAccounting methods
Issues in current ratio use
• Wide usage
• Assumption of business closure
• Mix of historical & current prices
• Affected from assets valuation
Accounts that require attention
• Securities:valuationMarket value (day of analysis)
• Accounts receivables:Bad debts – provisions
• Inventories: Valuation (LIFO v. FIFO)devalued – slow moving
Ways of analyzing the Current Ratio
• Times-series
• Cross sectional – related to sector
• Common size statement for the Current Ratio’s components
Matters arising
• Use of LIFO with inflation
• Effects of economic cycle
• Tampering the ratio:postponement or acceleration of
transactions that affect on the ratio
Current assets over-valuedDevaluation of liabilitiesDisposal of fixed assetsSubstitution of short-term debt with
long-term debt
Β) QUICK RATIO
• More conservative measure of liquidity
• spread 0,7 – 1,2
• average 0,9
advancescashsliabilitiecurrent
prepaidsinventorieassetscurrentQR
.exp
Quick ratio: Does not include
• InventoriesDifficulties in liquidation Subjectivity in valuation (market price vs.
purchase value)
• Receivables & liabilities that do not require cash inflow/outflow Prepaid expenses & advances to suppliersAdvances from customers & deferred income
D) Defensive Interval
ExpensesDaily
sReceivableSecuritiesCashDI
Daily Expenses:
(Yearly expenses-depreciation) / 365
TURNOVER RATIOS (Activity Measures)
• Calculate the time period for the liquidation of an account
• Turnover ratios: linked to liquidityAffect return
Operational target:
• Increase of Inventory Turnover• Reduce inventory held (δέσμευση
πόρων)Attention:• Seasonal inventories • valuation (LIFO under inflation)• Increase of IT by reducing inventory
2) Receivables Turnover Ratio
r)(times/yeasReceivable Average
credit)(on SalesRTR
RT
365Receivable Accountsin Days
Receivables from commercial activities only
(customers, notes receivables, etc)
Operational target:
• Increase of RT, with increase in sales
Attention:
• Sales on cash or on credit
• Seasonal receivables
• Provision for bad debts
• Add discounted notes receivables
• In relation to credit policy
Days accounts receivables due
client total 1-30 31-60 61-90 > 90
Χ 120 10 20 30 50
Ψ 150 - 30 50 70
Amount due in days
3) Accounts Payable Turnover Ratio
r)(times/yeaPayableAverage
PurchasesPTR
STR
365SuppliersinDays
Attention: suppliers plus notes payable from commercial activities
Operational target:
• Low PTR – increase in days accounts payable due (without price increase)
Attention:• Calculating purchases:
Cost of sales + inventory beginning – inventory end
• Seasonality of Accounts Payable
Inventory & Cash conversion cycle
• Operating cycle or Inventory conversion cycle = (Days in Inventory + Days in Accounts Receivable)
• Trading cycle or Net cash conversion cycle = (Days in Inventory + Days in Accounts Receivable – Days in accounts payable)