Financial Statement Analysis Chapter 7 Liquidity Bonsón, E., Cortijo, V., Flores, F.    Content on this file is licensed u...
Index <ul><li>Introduction </li></ul><ul><li>Cash flow analysis </li></ul><ul><li>Operating working capital analysis </li>...
Index <ul><li>Introduction </li></ul><ul><li>Cash flow analysis </li></ul><ul><li>Operating working capital analysis </li>...
Introduction <ul><li>Liquidity  refers to the capacity of the company to satisfy its  short-term  liabilities </li></ul><u...
Short-term debt to be satisfied Operating Working Capital  and Operating cycle Cash flow and  Liquidity reserves Trade and...
Index <ul><li>Introduction </li></ul><ul><li>Cash flow analysis </li></ul><ul><li>Operating working capital analysis </li>...
Cash flow analysis <ul><li>The objective is to state if the company can satisfy its short-term debts using </li></ul><ul><...
The special case of EBITDA
The special case of EBITDA EBITDA  (cash approach)
Liquidity reserves <ul><li>Under IFRS, assets are classified into current and non-current assets. In addition, in  both  c...
Index <ul><li>Introduction </li></ul><ul><li>Cash flow analysis </li></ul><ul><li>Operating working capital analysis </li>...
Operating working capital analysis <ul><li>Working capital, defined as the excess of current assets over current liabiliti...
Operating working capital analysis <ul><li>The sign, positive or negative of the OWC can  not  be used  a priori  as a per...
Index <ul><li>Introduction </li></ul><ul><li>Cash flow analysis </li></ul><ul><li>Operating working capital analysis </li>...
Coverage ratios <ul><li>Coverage ratios are used to measure relationships between different components of the OWC. The mos...
Index <ul><li>Introduction </li></ul><ul><li>Cash flow analysis </li></ul><ul><li>Operating working capital analysis </li>...
Operating cycle <ul><li>Also known as  Cash Conversion Cycle , is the time period in which a company converts its resource...
Operating cycle <ul><li>SP =  Inventories*365     Revenue   </li></ul><ul><li>RPP =  Receivables*365   </li></ul><ul><li> ...
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FSA Chapter 7

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FSA Chapter 7

  1. 1. Financial Statement Analysis Chapter 7 Liquidity Bonsón, E., Cortijo, V., Flores, F.   Content on this file is licensed under a Creative Commons Attribution Non-Commercial No Derivatives Works 3.0
  2. 2. Index <ul><li>Introduction </li></ul><ul><li>Cash flow analysis </li></ul><ul><li>Operating working capital analysis </li></ul><ul><li>Coverage ratios </li></ul><ul><li>Operating cycle </li></ul>
  3. 3. Index <ul><li>Introduction </li></ul><ul><li>Cash flow analysis </li></ul><ul><li>Operating working capital analysis </li></ul><ul><li>Coverage ratios </li></ul><ul><li>Operating cycle </li></ul>
  4. 4. Introduction <ul><li>Liquidity refers to the capacity of the company to satisfy its short-term liabilities </li></ul><ul><li>From an internal perspective, liquidity analysis can be conducted thanks to the cash flow budget or similar plan </li></ul><ul><li>From an external perspective, liquidity analysis can be performed using two different methodologies: </li></ul><ul><ul><li>based on the cash flows : in this case, we analyse if the company can meet its short-term liabilities using its operating cash flow, net , and its liquidity reserves . </li></ul></ul><ul><ul><li>based on the operating working capital , or the capacity of the current assets related to the company’s operating activities to generate enough cash so as to satisfy the related current liabilities </li></ul></ul>
  5. 5. Short-term debt to be satisfied Operating Working Capital and Operating cycle Cash flow and Liquidity reserves Trade and other payables Current tax liabilities Current liabilities (operating) Current provisions for employee benefits Other short-period provisions Other current financial liabilities Other current non-financial liabilities Liabilities included in disposal groups classified as held for sale Current liabilities (non-operating)
  6. 6. Index <ul><li>Introduction </li></ul><ul><li>Cash flow analysis </li></ul><ul><li>Operating working capital analysis </li></ul><ul><li>Coverage ratios </li></ul><ul><li>Operating cycle </li></ul>
  7. 7. Cash flow analysis <ul><li>The objective is to state if the company can satisfy its short-term debts using </li></ul><ul><ul><li>its operating cash flow, net </li></ul></ul><ul><ul><ul><li>EBITDA – interests – taxes </li></ul></ul></ul><ul><ul><ul><ul><li>EBITDA calculation depends on the chromosome of presentation for the company (8 possibilities) </li></ul></ul></ul></ul><ul><ul><li>and its liquidity reserves </li></ul></ul><ul><ul><ul><li>Non-functional assets that can be easily converted into cash </li></ul></ul></ul>
  8. 8. The special case of EBITDA
  9. 9. The special case of EBITDA EBITDA (cash approach)
  10. 10. Liquidity reserves <ul><li>Under IFRS, assets are classified into current and non-current assets. In addition, in both categories, it is possible to differentiate between functional and non-functional assets –also called liquidity reserves because they can be sold and converted into cash if the company has liquidity problems, without risking the company’s operative capacity </li></ul>Investment property Other non-current financial assets Non-current assets classified as held for sale Other current financial assets Liquidity reserves
  11. 11. Index <ul><li>Introduction </li></ul><ul><li>Cash flow analysis </li></ul><ul><li>Operating working capital analysis </li></ul><ul><li>Coverage ratios </li></ul><ul><li>Operating cycle </li></ul>
  12. 12. Operating working capital analysis <ul><li>Working capital, defined as the excess of current assets over current liabilities </li></ul><ul><li>Operating working capital (excess of operating current assets over operating current liabilities) </li></ul>+ Inventories + Trade and other receivables - Trade and other payables - Current tax liabilities Operating Working Capital
  13. 13. Operating working capital analysis <ul><li>The sign, positive or negative of the OWC can not be used a priori as a pertinent indicator </li></ul><ul><li>It is necessary to calculate turnovers and coverage ratios in order to analyze in depth the capacity of the operations to satisfy the related debt </li></ul>
  14. 14. Index <ul><li>Introduction </li></ul><ul><li>Cash flow analysis </li></ul><ul><li>Operating working capital analysis </li></ul><ul><li>Coverage ratios </li></ul><ul><li>Operating cycle </li></ul>
  15. 15. Coverage ratios <ul><li>Coverage ratios are used to measure relationships between different components of the OWC. The most meaningful are </li></ul><ul><li>Operating Current Ratio = Operating Current Assets </li></ul><ul><li>Operating Current Liabilities </li></ul><ul><li>Quick Ratio = Trade and other receivables </li></ul><ul><li>Operating Current Liabilities </li></ul><ul><li>It is expected to find positive values, better as higher , and it will be necessary to compare with an appropriate benchmark </li></ul>
  16. 16. Index <ul><li>Introduction </li></ul><ul><li>Cash flow analysis </li></ul><ul><li>Operating working capital analysis </li></ul><ul><li>Coverage ratios </li></ul><ul><li>Operating cycle </li></ul>
  17. 17. Operating cycle <ul><li>Also known as Cash Conversion Cycle , is the time period in which a company converts its resources into cash </li></ul><ul><li>It can also be defined as the total time needed to collect cash from sales after having paid for the raw materials and resources acquired </li></ul><ul><li>Operating Cycle = SP + RPP – PPP ( days ) </li></ul><ul><li>SP = Stockholding period </li></ul><ul><li>RPP = Receivables processing period </li></ul><ul><li>PPP = Payables processing period </li></ul>
  18. 18. Operating cycle <ul><li>SP = Inventories*365 Revenue </li></ul><ul><li>RPP = Receivables*365 </li></ul><ul><li> Revenue </li></ul><ul><li>PPP = Operating current liabilities*365 </li></ul><ul><li>Revenue </li></ul><ul><li>If SP + RPP < PPP, the company can have a negative OWC without having liquidity problems because its payables processing periods are longer that the time needed to sell its inventories and collects its receivables. </li></ul><ul><li>On the other hand, if SP + RPP > PPP, the company must have a positive OWC </li></ul>

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