Liquidity and Working Capital Current Assets Classification as current asset depends on: BAlane- 1. Manament's intent 2. Industry practice Analysis must assess this classification 1 Is classification as current asset appropriate? 2. If not, then adjust accounts and amounts among current and noncurrent
Classification as current asset depends on: 1. Manament’s intent 2. Industry practice Analysis must assess this classification 1. Is classification as current asset appropriate? 2. If not, then adjust accounts and amounts among current and noncurrent Liquidity and Working Capital Current Assets Balance Sheet
Liquidity and Working Capital Current liabilities Classification as current liability depends on 1.Manament's intent 2. Industry practice Analysis must assess this classification 1. Is classification as current liability appropriate? 2. If not, then adjust accounts and amounts among current and noncurrent 3. Are current liabilities reported? 4. If not, then adjust accounts for these amounts--potential examples Contingent liabilities associated with loan guarantees Future minimum rental payments under noncancelable operating leases Progress payments under contracts Current deferred tax liabilities(and assets)
Classification as current liability depends on: 1. Manament’s intent 2. Industry practice Analysis must assess this classification 1. Is classification as current liability appropriate? 2. If not, then adjust accounts and amounts among current and noncurrent 3. Are current liabilities reported? 4. If not, then adjust accounts for these amounts—potential examples: • Contingent liabilities associated with loan guarantees • Future minimum rental payments under noncancelable operating leases • Progress payments under contracts • Current deferred tax liabilities (and assets) Liquidity and Working Capital Current Liabilities
Liquidity and Working Capital Working Capital Working capital is defined as the excess of current assets over current liabilities Widely used measure of short-term liquidity Deficient when current liabilities exceed current assets In surplus when current assets exceed current liabilities Margin of safety for creditors Aliquid reserve to meet contingencies and uncertainties A constraint for technical default in many debt agreements
Working capital is ➢ defined as the excess of current assets over current liabilities ➢ Widely used measure of short-term liquidity ➢ Deficient when current liabilities exceed current assets ➢ In surplus when current assets exceed current liabilities ➢ A margin of safety for creditors ➢ A liquid reserve to meet contingencies and uncertainties ➢ A constraint for technical default in many debt agreements Liquidity and Working Capital Working Capital
Liquidity and Working Capital Working Capital Working capital more relevant when related to other key variables such as ☆ Sales ◇ Total assets Working capital is of limited value as an absolute amount
Working capital more relevant when related to other key variables such as Sales Total assets Working capital is of limited value as an absolute amount Liquidity and Working Capital Working Capital
Liquidity and Working Capital Current Ratio Current assets Current ratio= Current liabilities Current Ratio Reflects on Current liability coverage -assurance in covering current liabilities Buffer against losses - margin of safety for shrinkage in noncash current assets Reserve of liquid funds --margin of safety ati against uncertainties and shocks to cash flows 不e
Current Ratio Reflects on: • Current liability coverage -- assurance in covering current liabilities • Buffer against losses -- margin of safety for shrinkage in noncash current assets • Reserve of liquid funds --margin of safety against uncertainties and shocks to cash flows Liquidity and Working Capital Current Ratio Current liabilities Current assets Current ratio=