Q1 b

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  • Created by: ChrisB98
  • Created on: 17-05-19 16:12
Liquidity
Current Ratio and Quick Ratio. – Ability to meet its liabilities in the short term (under 12 months). Quick ratio is more conservative as it secludes inventory from Current Assets.
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Liquidity - high
too much of its assets are tied up in unproductive activities – e.g. too much inventory? Many manufacturers take a long time to convert raw materials to finished production & will legitimately have high levels of inventory.
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Liquidity - low
risk of not being able to pay your way (but retailers - e.g. Tesco, is very successful & efficient company with a low current ratio & negative working capital. A retailer who sells for cash but buys on credit can be in strong liquidity position with
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Liquidity limitations
 Limitations: Balance Sheet gives us the CA & CL at a specific date. However, the figures on that date may not be representative of the whole year.
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Efficiency
Inventory Holding/Conversion Period (Stock Days) (Inventory Turnover). Trade Receivables Turnover (Debtors Collection Period) (Debtors’ Days). Creditors Deferral Period (Creditors’ Days) (Payables Ratio). Cash Conversion Cycle (Operating Cash Cycle
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Efficiency inventory and trade receivables
Lower is better
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Efficiency inventory - high
is over producing and holding too much inventory. This leaves a great deal of cash tied up in inventory. It also increases the risk of loss through inventory damage, obsolescence or theft. The extra inventory will also incur higher storage costs
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Efficiency trade payables
higher is better. BUT if company extends creditors days without permission it would affect reputation and credit scores. If you delay payments to creditors past their due dates, you risk losing suppliers or paying interest on overdue accounts
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Efficiency cash conversion cycle - shorter
 The shorter the cycle, the less time capital is tied up in the business process, the better for the company's bottom line.
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Efficiency cash conversion cycle - longer
The greater the pressure on liquidity
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Capital gearing
 Higher is riskier - The higher the ratio the more the business is exposed to interest rate fluctuations & to having to pay back interest & loans before being able to re-invest earnings.
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ROCE
if lower means overtrading
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Operating Profit Margin
Lower means overheads may have been more tightly controlled
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Critical analysis
Discuss which specific item has changed not just say the ratio has increased or decreased – very important
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Conclude
Which year is better in performance and position
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Other cards in this set

Card 2

Front

Liquidity - high

Back

too much of its assets are tied up in unproductive activities – e.g. too much inventory? Many manufacturers take a long time to convert raw materials to finished production & will legitimately have high levels of inventory.

Card 3

Front

Liquidity - low

Back

Preview of the front of card 3

Card 4

Front

Liquidity limitations

Back

Preview of the front of card 4

Card 5

Front

Efficiency

Back

Preview of the front of card 5
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