Chapter 2 - Balance Sheet Analysis Flashcards
How do you calculate the Working Capital Requirement (WCR)? And what is it?
WRC= inventories + short term receivables (non-financial) - short-term payables (non-financial)
While we produce, we freeze some cash in the production, because we have inventories, receivables, payables etc., and we have to use a certain amount for the production to keep on going:
- Positive WCR - absorbs resources at a cost, you need financing. Cash is frozen because of operations.
- Negative WCR - generate resources, opportunity gain. Cash is freed because of operations
What can affect the WCR? 3 factors.
The sales: positive (negative) WCR would increase (decrease) as a result of increased sales.
The duration of receivables/payables: increase in duration of pay./rec. results in an decrease in WCR.
Ratio of VA: high (low) VA results in a lower (higher) WCR due to the payables of external services that are associated with VA.
How is Net Cash calculated?
Net cash = cash and cash equivalent - bank overdrafts
What is the liquidity equation?
Liquidity equation = WC - WCR
Do we fulfil the requirements to undertake operations?
Liquidity constraint: Working capital > working capital requirement
The working capital (WC) has to be larger than the WCR, in order for the company to be determined as liquid, otherwise it is illiquid
How is a cashed out receivable restated?
Increasing trade accounts receivables (by cashed out amount)
Increasing bank overdrafts (by cashed out amount)
How is a deferred taxes restated?
Decrease in equity (of the deferred tax amount)
Increase in deferred tax liabilities (of the deferred tax amount)
How is a loan of 500 with a redemption of 40 restated
Assets:
Cash = 500
Redemption = 40
Liability:
Loan = 540
How is deferred charges restated?
Deferred charges are often an prepaid expense, treated as an asset on the balance sheet. Deferred charges are therefore often amortised over a certain period, e.g., 12 times a year for rent.
The amount of the deferred charge as an asset is decreased by the amortisation. The income on the equity side of the balance sheet is decreased by the same amount.
The amount is added to the amortisation expense in the income statement.
How do you calculate the duration of trade payables?
trade payable duration = trade payable/purchases incl. taxes
or
trade payable duration = trade payable/purchases incl. taxes * 360
to get the duration in days
How do you calculate the duration of trade receivables?
trade receivable duration = trade receivable/sales incl. taxes
or
trade receivable duration = trade receivable/sales incl. taxes * 360
to get the duration in days
What are the static ratios?
Financial debts/equities - should be lower 1, otherwise we are pushing towards having too much debt
Total borrowing/equities+liabilities - should be lower than 0,5 - measuring the same thing
What are the dynamic ratios?
Financial debts/SFC - should be smaller than 3 or 4, as it shows how long it would take the company to pay back the current financial debt. A company that is not able to pay back loans in between 3 and 4 years, when using all their cash generation to pay back loans, is not healthy
Interest/EBITDA - should be less than 0,5
How is a lease restated on the balance sheet?
On income statement:
The leasing fee is subtracted from external services
The amortisation is added to DA
The difference between the added amortisation and the leasing fee is added to financial expenses
On balance sheet:
DA is subtracted from the gross amount on the asset side
The remaining amount of the lease on the liability side (loan)
How is cashed-out receivables restated?
Amount of cash-out added to trade receivables
Amount of cash-out added to liability (bank overdraft)
How is deferred tax liabilities restated?
Decrease in equity
Increase in deferred tax liability
