Learning area 9 Chapter 12 Lecture 3(b). 8 Liquidity ratios page 38 …NB Measure if a company can pay its short-term debts when they become due 8.1 Current.

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Presentation transcript:

Learning area 9 Chapter 12 Lecture 3(b)

8 Liquidity ratios page 38 …NB Measure if a company can pay its short-term debts when they become due 8.1 Current ratio: = current assets current liabilities Does the company have sufficient current assets to pay its current liabilities? Norm: 2:1 (may differ for different industries) Too low? (struggle to pay creditors) Too high? (too much money in unproductive s/t assets) Only read p39

8 Liquidity ratios page 40 (continue…) 8.2 Quick ratio (acid test/liquidity ratio): = current assets – inventories (stocks) current liabilities If inventories are not sold, will the company still be able to pay its current liabilities? Norm: 1:1 Ratio of less than 1 – indication company might struggle to pay its creditors

8 Liquidity ratios Cover-up Ltd: Current ratio: = / = 2.83 Quick ratio: = ( – )/ = 1.8 OR = ( )/ = 1.8

9 Efficiency ratios page 41 How efficiently is the company’s working capital (stock, debtors, creditors) managed? 9.1 Stock turnover 9.2 Debtors turnover period 9.3 Creditors turnover period

9.1 Stock (inventory) turnover period page 41 = stockx 365 Cost of sales How long is stock held before it is sold? Stocks = raw materials + work-in-progress + finished goods Compare to similar industry! Cover-up Ltd: = / x 365 = 116 days

9.2 Debtors turnover period page 42 = debtors (trade receivables)x 365 credit sales Average time that debtors take to settle their balances Credit sales – only portion sold on credit!! Credit sales – only portion sold on credit!! Cover-up Ltd (assume 80% of sales on credit): = /( x 80%) x 365 = days

9.3 Creditors turnover ratio page 43 = trade payables (creditors)x 365 credit purchases Average time that a company takes to pay its creditors Cover-up Ltd (assume purchases 100% on credit) = / x 365 = 123 days

9 Efficiency ratios Cash conversion cycle: = Stock turnover + debtors turnover period – creditors turnover period Cover-up Ltd = – 123 = 103 days Need short-term finance for 103 days

Homework Question p44 Q&A Bank Part 3 Q , 3.12 – 3.15 Question 3.28, 3.29

Class test Monday 12 May 2014 (During lecture time) Only on Chapter 12 Multiple choice questions !!! Calculations and theory!!! Total 20 marks 30 minutes