As we know working capital is the life blood and centre of a business. Adequate amount of working capital is very much essential for the smooth running of the business. And the most important part is the efficient management if working capital in right time. The liquidity position of the firm is totally effected by the management of working capital. So, a study of changes in the uses and sources of working capital is necessary to evaluate the efficiency with which the working capital is employed in a business. This involves the need of working capital analysis.
The analysis of working capital can be conducted through a number of devices, such as:
1. Ratio analysis.
2. Fund flow analysis.
3. Budgeting
1. RATIO ANALYSIS
A ratio is a simple
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It is defined as the relation between current assets and current liabilities. Thus,
Current ratio = Current assets Current liabilities
The two components of this ratio are
Current assets
Current liabilities
Current assets include cash, marketable securities, bill receivable, sundry debtors, inventories and work in progresses. Current liabilities include outstanding expenses, bill payable, dividend payable etc.
A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time. Other hand a low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e, current assets double the current liabilities is considered to be satisfactory.
Calculation of current ratio
Table no 4.1. showing the current ratio ( Rupees in crores) year 2011-12 2012-13 2013-14
Current assets 2.37 10.33 33.64
Current liabilities 0.96 5.90 15.26
Current ratio 2.47 1.74
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Cash is needed to keep the business running on a continuous basis. So the organization should have sufficient cash to meet various requirement. The above graph is indicate that in 2011-12the cash is .039 crores but in 2012-13 it has increase to2.64 Crores & in 2012-13 it is increased to 2.39Crorse. in 2013-14, it is increased up to approx. 5.13% cash balance. So in 2010-11, the company has no problem for meeting its requirement as compare to 2011-12.
DEBTORES:
Table no 4.11 SHOWING THE DEBTOR4S NIN THE ORGANIZATION (Rs. In Crores)
Year 2011-12 2012-13 2013-14
Debtors 1.00 0.54 15.34 Source: computed from annual report
Figure 4.8 showing the debtors in the organization
Interpretation:
Debtors constitute a substantial portion of total assets. In India it constitute one one third of current assets. The above graph is depicting that there is increase in debtors. It represents an extension of credit to customers. The reason for increasing credit is competition and company liberal credit
These ratios can be used to determine the most desirable company to grant a loan to between Wendy’s and Bob Evans. Wendy’s has a debt to assets ratio of 34.93% while Bob Evans is 43.68%. When it comes to debt to asset ratios, the company with the lower percentage has the lowest risk. Therefore, Wendy’s is more desirable than Bob Evans. In the area of debt to equity ratios, Wendy’s comes in at 84.31% while Bob Evans comes in at 118.71%. Like debt to assets, a low debt to equity ratio indicates less risk in a company. Again, Wendy’s is the less risky company. Finally, Wendy’s has a times interest earned ratio of 4.86 while Bob Evans owns a 3.78. Unlike the previous two ratios, times interest earned ratio is measured on a scale of 1 to 5. The closer the ratio is to 5, the less risky a company is. From the view of a banker, any ratio over 2.5 is an acceptable risk. Both companies are an acceptable risk, however, Wendy’s is once again more desirable. Based on these findings, Wendy’s is the better choice for banks to loan money to because of the lower level of
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
In order to determine the value of operations, and using proforma income statement and balance sheet statement, Cash flow statement was formulated for the next 5 years. The Account Receivables plus the Inventory minus the Account Payable was determined as Net Operating Working Assets. An organization cost of 0,000 was amortized over the 5-year period.
This is an essential ratio which discloses about the liquidity position of a company. It is determined by dividing the current assets and current liabilities of the company. In this case, the Exxon’s current ratio is decreasing which indicates about the decreasing liquidity of the company. Current ratio of Chevron is far ahead than Exxon. This ratio is fluctuating for Chevron, but the fluctuation is minor and not drastic. Exxon ratios are fluctuating within 1.0 to 0.84, whereas Chevron ratio is always greater than 1.50. This clearly indicates that Chevron is in better position in meeting its obligations when compared to Exxon. If this decline continues for Exxon then there are chances where the company cannot meet up its short-term obligations and lead to financial distress.
The Current Ratio is calculated by taking the current debt and dividing it by the current liabilities. It is the measurement on how a company can meet its short term liabilities with liquid assets (Loth, Rihar, 2015a).A higher ratio indicates favorable activity. A company should be able to meet it responsibilities with its
Current Ratio – For the last three years was growing from 3.56 in 2001 to 3.81 in 2002 to 4.22 in 2003. The reason of grow is increased in Assets. Even though Liability was growing, Asset grow was more significant.
The current ratio measures the ability of a business to pay back their liabilities. Kroger’s current ratio for both years was under one, which shows that Kroger has more current liabilities than current assets. This could predict that Kroger is not in good financial health at this time. However, some of their competitors have current ratios under one too. The grocery store industry trends to have lower liquidity ratios, because they keep lower levels of current assets. Their ongoing sales help pay upcoming liabilities. Still, business owners and investors would be looking for a current ratio over one at least.
The following content provided will include information regarding Nikes Inc. cash management strategies, which will include more in depth information from the previous group paper. In addition, working capital recommendations will be provided to senior management base on next year’s in the pro-forma financial statements.
Before beginning an analysis of a company it is necessary to have a complete set of financial statements, preferably for the pas few years so that historical trends can be obtained. Ratios are a way for anyone to get an idea of the financial performance of a company by using the information contained in the financial statements. Ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage. This document will use a variety of these ratios to analyze the firm, Sample Company, as of December 31,2000.
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Net working capital, is a key figure to watch only if you have several years worth of reports to compare.
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