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Analysis and Interpretation of British Accounts
Short-term Liquidity Measures
Liquidity
The amount of time required to convert an asset into cashor pay liability.1
„Encyclopaedia of Banking & Finance“; Munn/Garcia/Woelfel; Bankers Publishing Company; 9th Edition; Illinois 1991
Level of Liquidity
Fixed Assets
Stocks
Debtors
Investments
Cash at Bank andin Hand
Lev
el o
f L
iqui
dity
Asset
Current Ratio
Long Investments
Stocks
Cash
Owner’s Fund
Long-term Liabilities
Current Liabilities
Balance Sheet
sLiabilitieCurrent
AssetsCurrentRatioCurrent
+
Quick Ratio
Long Investments
Stocks
Cash
Owner’s Fund
Long-term Liabilities
Current Liabilities
Balance Sheet
sLiabilitieCurrent
InventoryAssetsCurrentRatioQuick
Working Capital to Sales Ratio100
Sales
sLiabilitieCurrentAssetsCurrentRatioSalestoCapitalWorking
Long investments
Current Assets
Owner’s Fund
Long-term Liabilities
Current Liabilities
Balance Sheet
Sales £1.250.000
PBIT £ 850.000Interest £ 136.000PBT £ 714.000Tax £ 264.180PAT £ 449.820Ordinary £ 180.820RE £ 269.000
Profit & Loss Account
Working Capital Days
Goods are receivedon day 0
Goods are soldon day 44
Payment is receivedon day 85
Goods are receivedon day 0
Goods are receivedon day 0
inventory44 days
accounts receivable41 days
accounts payable26 days
Time gap cash-out/cash-in
The funding requirementon the company is
59 days
Working Capital Required
365
daysinGapTimeSalesrequiredCapitalWorking
An increase in Sales produces the need for additional working capital!
