LIQUIDITY RATIOS
1. CURRENT RATIO
Average current assets / average short-term liabilities
It is calculated by dividing average current assets (including prepayments and accrued income) by average short-term liabilities (including accruals and deferred income)
This Ratio measures the surplus of liquid funds over current liabilities. The surplus of current assets over current liabilities provides a margin of safety for those who have invested money in the business. A value of around 2 is considered satisfactory.
2. QUICK RATIO
(Average current assets – Inventory) / Average Short-term Liabilities
It is calculated by dividing average current assets, after deducting inventories (including prepayments and accrued income), by average short-term liabilities (including accruals and deferred income)
This Ratio shows the ability of the business to service its short-term liabilities by liquidating its immediately realisable assets. Inventories are deducted because, on the one hand, they are the least liquid of the current assets and, on the other, liquidating inventories is very likely to result in a loss. A value > 1 is considered satisfactory.
3. CASH RATIO
Average cash / average short-term liabilities
It is calculated by dividing average Cash by average short-term liabilities (including accruals and deferred income)
This Ratio shows how many times the cash assets of a business cover its current and overdue liabilities. The value of the ratio is usually <1; even Banks do not show a cash ratio greater than one.
4. RECEIVABLES TURNOVER
Annual Sales / Average Receivables
It is calculated by dividing Sales by average Receivables
This Ratio shows how many times within the year the business collects its receivables. To be satisfactory, the value of the ratio must be well above one; it also depends on the sector to which the business belongs and on the conditions prevailing in the market.
5. AVERAGE RECEIVABLES COLLECTION PERIOD
(Average Receivables * 365 days) / Annual Sales
It is calculated by multiplying average Receivables by 365 days and dividing the result by annual Sales
This Ratio shows in how many days the business expects to collect its receivables from the moment the sales were made. The shorter this time, the faster the collection, and so the shorter the time funds are tied up, the better the position of the business in terms of credit granted and the lower the probability of losses from bad debts.
6. INVENTORY TURNOVER
Cost of Goods Sold / Average Inventories
It is calculated by dividing the Cost of Goods Sold by Average Inventories
This Ratio measures the average rate at which inventories enter and leave the Business. In other words, it shows how many times the business sold out its merchandise and had to restock its warehouses within one financial year. A high value of the ratio may indicate successful inventory management and a good cash position. A low value may mean that business activity is slow, which ties up capital in inventories relative to sales; the business is also obliged to keep high liquidity in order to meet its short-term liabilities.
7. AVERAGE INVENTORY HOLDING PERIOD
(Average inventories*365 days) / Cost of goods sold
It is calculated by multiplying average inventories by 365 days and dividing the result by the Cost of Goods Sold.
This ratio measures how many days inventories stay in the business from purchase to sale. In Industrial businesses that also trade the products they make, the cycle from purchase to sale of inventories lasts more days, since the manufacturing stage intervenes. For this reason the profit margin of an industrial unit should be larger than that of a commercial unit, to cover the delay due to manufacturing and the capital invested in inventories of raw and auxiliary materials. The shorter the time inventories stay in the warehouse, and provided there is no forced liquidation, the greater the liquidity of the business. The longer inventories stay in the business, the lower its liquidity.
8. TURNOVER OF SHORT-TERM LIABILITIES
(Cost of Goods Sold – Depreciation) / Average Short-term liabilities
It is calculated by deducting depreciation from the cost of goods sold and dividing the difference by average short-term liabilities
This ratio shows how many times within the year the credit received by the business was renewed. Monitoring this ratio over a number of years shows whether there is a change in the business’s borrowing policy.
9. PAYMENT PERIOD OF SHORT-TERM LIABILITIES
(Average Short-term liabilities*365 days) /( Cost of goods sold – Depreciation)
It is calculated by multiplying average short-term liabilities by 365 days and dividing the result by the cost of goods sold less depreciation
This ratio shows in how many days the business pays its short-term creditors. Combined with the days it takes to collect its receivables from customers, it reveals the resulting liquidity of the business and its creditworthiness. If the business closely monitors the payment period of its liabilities, it tries to balance the need to have cash available with keeping its suppliers satisfied. If the payment period of short-term liabilities is longer than the collection period of receivables, the business has created a source of financing that is an effective use of external funds.
10. DEFENSIVE INTERVAL
(Average Current assets – Average Inventory) / Average daily Operating expenses
It is calculated by dividing the difference between average current assets and average inventories by average daily operating expenses.
The defensive interval ratio measures the number of days for which the needs of the business’s operations for liquid assets can be met from its stock of defensive assets, without the business relying on additional inflows from sales or other sources. By defensive assets we mean cash, marketable securities and receivables. Average daily operating expenses are found by dividing total operating expenses (cost of goods sold + administrative expenses + distribution expenses + sundry daily payments) by 365 days. Operating expenses do not include those that do not involve a cash outflow, such as depreciation, prepaid expenses and advances for the purchase of raw and auxiliary materials.
11. DOUBTFUL RECEIVABLES PERCENTAGE
(doubtful + Disputed receivables) / Total Receivables (%)
It is calculated by dividing total doubtful receivables by total receivables.
This ratio shows what percentage % of total receivables is doubtful. The trend of this ratio is monitored over time to assess the quality and liquidity of receivables. An increase in this ratio indicates a deterioration in the ability to collect receivables.
12. COVERAGE DAYS
((Short-term liab.-(Current Assets-Inventories))/(Working Capital from the Operations of the Business)) * 365 days
It is not calculated if short-term liabilities are less than the immediately liquid current assets (current assets – inventories). In that case the value of the ratio would be negative. It is calculated by deducting the immediately realisable assets from short-term liabilities and dividing the difference by the net working capital from the operations of the business, multiplied by 365 days. Net working capital is the sum of net profit after tax plus the depreciation for the year.
This ratio gives a measure related to the quick ratio, but it has the additional advantage that the difference between short-term liabilities and immediately realisable assets is related to the ability of the business to generate working capital from its operations. Lower values of the ratio are preferable to higher ones, because they mean a shorter time to cover the liabilities.
13. CASH COVERAGE PERIOD OF LIABILITIES
Short-term liabilities falling due in 30 days / Cash available in 30 days
1. Short-term liabilities falling due in 30 days are calculated as: (a) Suppliers (b) Short-term bank borrowing divided by 12 months (c) Taxes and other short-term liabilities divided by 12 months. 2. Cash available in 30 days is calculated as: (a) Cash (b) Marketable securities (c) Customers divided by 12 months
This ratio shows, in number of days, when the business will be able to pay liabilities falling due in 30 days. A value below 30 days can be considered a favourable development, while if the value of the ratio is above 30 days the business may be late in meeting its liabilities. Calculating the cash coverage period of liabilities is most useful when it is treated as an indication of when the customer should pay.
The Company Specisoft S.A.
Specisoft S.A. was founded in 1987 as a specialised software development company, its main characteristic being the development of software on subjects involving knowledge, high specialisation, special optimisation algorithms and very large-scale data processing.
The subjects of the programs (among others) concern a) Business software (Business Planning – Business Plan, Financial Analyses of Balance Sheets, Business Valuation, Standard Costing, Forecasts, Investment Appraisals etc.), b) Financial software (Fundamental Analysis, Portfolio Selection etc.), c) Business Games (Business Simulators), d) Optimisation of Economic Problems, e) Educational software on the above subjects.
The programs run on WINDOWS locally, on a network and over the INTERNET.
Almost all the company’s employees are university graduates. In addition, the company employs specialised, highly experienced external associates holding postgraduate degrees (Master’s and PhD) and has university professors as advisers.
The company’s customers are Businesses, Business Consultants, Accounting firms, Public Organisations, Municipalities etc. Among its customers (the company has more than one thousand seven hundred) are many of the largest Greek companies, more than eighty-five of them listed on the Athens Stock Exchange.
A very important part of the company’s customer base is the Greek higher-education Institutions (universities and technological institutes), Vocational education (Public and Private vocational institutes), Colleges, Seminar Organisations, Vocational Training Centres etc., which equip their laboratories with the company’s programs, used directly in the training of their students.
Specisoft, with its software technology, its specialised optimisation algorithms and the knowledge of specialist financial subjects that it embodies in the software it produces, can be described as a knowledge company within the emerging knowledge economy.
Specisoft S.A.
17 Pergialitou St., 15451 Neo Psychiko
Tel: +30 210-6911468, Fax: +30 210-6993791
e-mail: info@specisoft.gr, SITE: www.specisoft.gr