Working Capital – Session 2

Recap
• What is Working Capital?
Measure of liquidity.
Working Capital = CA-CL
Working Capital = Long term Capital Employed - Fixed Asset

Amount of funds required to fund

Working Capital needs
Working Capital Defined as per annual report
of Asian Paints
• Any asset is classified as current asset if it satisfies any of the following
cases:
• The asset/ liability is to be settled in the normal operating cycle
• The asset/liability is intended for sale or consumption
• The asset is held for primarily trading
• The asset is expected to be settled within 12 months of the reporting
period
• The asset is cash or cash equivalent; unless it is restricted from being
exchanged or used to settle liability for at least 12 months after the
reporting date.
• In the case of liability company does not have an unconditional right to
defer settlement of the liability at least 12 months after the session.
Financial Need for Operation
• FNOs = CA- Short Term Obligations
• Note: Short Term Debts is not to be included
Determinants of FNO
• Accounts Payable =f(Units bought, Price of Goods, Days of Credit)
• Accounts Receivable = f(Sales Volumes, Sale Price, Days Credit on
Customers
• Inventory = f(sales volume, cost of goods, days in inventory)
• Cash Holding = f(Activity level, Efficiency, Production, Cost Structure)
Thinkers Corner
• What do you think should be the FNO for:
1. A restaurant
2. An airline industry
3. A manufacturing firm
Decrease in fixed assets leads to increase in Working capital
requirement
What does zero or negative FNO imply ?
What does company strategically intend to control – FNO or Working
Capital?
Ratio Analysis
RETURN RATIOS
• Return on Asset
• Return on Equity
• Return on Net Assets
• RONA = (EBIT *(1-t))/Net Assets
MARGIN RATIOS
• Gross Profit Margin
• Operating Profit Margin
• Net Profit Margin
Current Ratios
Liquidity Ratio = Current Assets/ Current Liabilities
Quick Ratio = (Current Assets – Inventories)/Current Liabilities
Days of Cash = (Cash and Marketable Securities)/ Daily Expenses
Activity Ratios

• Account Receivable Turnover

• Accounts Payable Turnover
• Inventory Turnover
• Days of Receivables = Accounts Receivables/ Daily Sales
• Days of Inventory = Accounts Payable/ Daily Purchase
• Days of Payables = Accounts Payable = Accounts Payable / Daily
Purchase
Thinkers Corner
• ROE = Net Income/ Equity
• ROE = Return from Assets + Debt/ Equity * (ROA- kd
• RONA?