SFP Analysis Flashcards
What is liquidity?
Analyse cash balance and allows users to see if a business can pay its debts as they fall due
What is done before analysing liquidity?
Look at movement in cash and cash equivalents and then explain the movement
What happens once cash movements analysed?
Analyse the liquidity ratios
Current ratio calculation? (X:1)
Current assets/current liabilities
Issue with current ratio?
Includes inventory, inventory lacks liquidity
Quick ratio calculation? (X:1)
(Current assets - inventory)/Current liabilities
Inventory holding period calculation?
(Inventory/Cost of sales) * 365 days
Inventory days going up? (Bad)
There’s a risk of obsolescence
Stock holding costs (Increases in conditions for freezing goods)
Bulk purchases (Increased inventory)
Change in inventory profile (Seller bigger items, means selling not as quick)
Unpopular new product
Inventory days going up? (Bad)
Risk of stock out (nothing left for christmas)
Inefficiencies in production (less inventory)
How to calculate receivable days (receivables collection period)
(Receivables/Credit sales) * 365 days
Receivables days going up? (Bad)
Inefficiencies in collection
Selling overseas
Risk of irrecoverable debts
Receivables days going down? (Good)
Improved credit control
Changes in customer terms
How to calculate payable days (payables payment period)
(Payables/Credit purchase) * 365 days
Payables days going up? (Bad)
Cash flow issues
Negotiated better terms
Risk of losing supplier goodwill (not happy with extending credit)
Using terms on offer
Payables days going down (Good)
New automated payment system
Prompt payment discount used (Pay quicker, pay less)
What is solvency?
Allows users to assess a company’s ability to pay off debts in the long-term
How to calculate gearing ratio (related to solvency)?
(Debt/capital employed) * 100%
OR
(Debt/equity) * 100%
What is interest cover?
Allows users to assess company’s abiltiy to pay interest
How to calculate interest cover?
PBIT / Interest payable
Reasons for decrease in gearing?
Issued new shares
Repaid borrowings
Reasons for increase in gearing?
Increase borrowings
Shareholder dividends at risk
Further borrowings difficult to obtain
Debt cheaper than equity (increased value of company)
Increase in interest cover reason?
More secure interest payments
Decrease in interest cover reason?
Potential risk of default
Does profit equal cash flow?
No
