SHORT TERM LIQUIDITY

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

LIQUIDITY RATIOS Α) CURRENT RATIO

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

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

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

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

Matters arising Use of LIFO with inflation Effects of economic cycle Tampering the ratio:  postponement or acceleration of transactions that affect on the ratio

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

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

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

C) ACID RATIO The most strict liquidity measure

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

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

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

1) Inventory Turnover Ratio

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

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

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

Days accounts receivables due clienttotal > 90 Χ Ψ Amount due in days

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

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

Inventory & Cash conversion cycle Operating cycle or 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)

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