SHORT TERM LIQUIDITY

1. SHORT TERM LIQUIDITY

2. Importance of short-term Liquidity • Definition: The ability to cover short-term debt • Interests shareholders & creditors • Taking advantage of market opportunities • Static vs. dynamic view • Reverse relation to Return

3. LIQUIDITY RATIOS Α) CURRENT RATIO

4. Current Ratio value • Normal spread 1-2 • average 1,5 • Current ratio relates to: • sector • Business life cycle • Business organization • Accounting methods

5. Issues in current ratio use • Wide usage • Assumption of business closure • Mix of historical & current prices • Affected from assets valuation

6. Accounts that require attention • Securities: • valuation • Market value (day of analysis) • Accounts receivables: • Bad debts – provisions • Inventories: • Valuation (LIFO v. FIFO) • devalued – slow moving

7. Ways of analyzing the Current Ratio • Times-series • Cross sectional – related to sector • Common size statement for the Current Ratio’s components

8. Matters arising • Use ofLIFOwith inflation • Effects of economic cycle • Tampering the ratio: • postponementoraccelerationof transactions that affect on the ratio

9. Current assets over-valued • Devaluation of liabilities • Disposal of fixed assets • Substitution of short-term debt with long-term debt

10. Β) QUICK RATIO • More conservative measure of liquidity • spread 0,7 – 1,2 • average 0,9

11. Quick ratio: Does not include • Inventories • Difficulties in liquidation • Subjectivity in valuation (market price vs. purchase value) • Receivables & liabilitiesthat do not require cash inflow/outflow • Prepaid expenses & advances to suppliers • Advances from customers & deferred income

12. C) ACID RATIO • The most strict liquidity measure

13. D) Defensive Interval Daily Expenses: (Yearly expenses-depreciation) / 365

14. Ε) CF(OA) / Current Liabilities • Dynamic liquidity test • Shows financial strength • average 0,40

15. TURNOVER RATIOS (Activity Measures) • Calculate the time period for the liquidation of an account • Turnover ratios: • linked to liquidity • Affect return

16. 1) Inventory Turnover Ratio

17. Operational target: • Increase of Inventory Turnover • Reduce inventory held (δέσμευση πόρων) Attention: • Seasonal inventories • valuation (LIFO under inflation) • Increase of IT by reducing inventory

18. 2) Receivables Turnover Ratio Receivables from commercial activities only (customers, notes receivables, etc)

19. Operational target: • Increase of RT, with increase in sales Attention: • Sales on cash or on credit • Seasonal receivables • Provision for bad debts • Add discounted notes receivables • In relation to credit policy

20. Days accounts receivables due Amount due in days client total 1-30 31-60 61-90 > 90 Χ 120 10 20 30 50 Ψ 150 - 30 50 70

21. 3) Accounts Payable Turnover Ratio Attention: suppliers plus notes payable from commercial activities

22. Operational target: • Low PTR – increase in days accounts payable due (without price increase) Attention: • Calculating purchases: • Cost of sales + inventory beginning – inventory end • Seasonality of Accounts Payable

23. Inventory & Cash conversion cycle • Operating cycleor Inventory conversion cycle = (Days in Inventory + Days in Accounts Receivable) • Trading cycle or Net cash conversion cycle = (Days in Inventory + Days in Accounts Receivable – Days in accounts payable)

24. Operational Target: • Decrease in Inventory conversion cycle • Increase in accounts payable credit period • Decrease in Net cash conversion cycle