Topic 6:

Liquidity andsolvency analysis

AnaMAriasAlvarez

UniversityofOviedo
DepartmentofAccounting
amarias@uniovi.es

SchoolofBusinessAdministration
Course:FinancialStatementAnalysisandManagementControl
BachelorsDegreeinEconomics

AnaMAriasAlvarez (University ofOviedo) Liquidity andsolvency analysis OpenCourseWare

 6.1.Analysis ofthe equilibrium offinancial structure.
6.2.Techniques andratiosfor financial analysis.
6.2.1.Shortterm financial analysis.
6.2.2.Longterm financial analysis.

2/12 AnaMAriasAlvarez (University ofOviedo) Liquidity andsolvency analysis OpenCourseWare

 6.1: ANALYSIS OF THE EQUILIBRIUM OF FINANCIAL STRUCTURE.

WORKINGCAPITAL

Current assets Current liabilities =

(Equity +Noncurrent liabilities ) Noncurrent assets

Working capital is the portion of current assets which is financed

with longterm funds.

3/12 AnaMAriasAlvarez (University ofOviedo) Liquidity andsolvency analysis OpenCourseWare

 6.2: TECHNIQUES AND RATIOS FOR FINANCIAL ANALYSIS.

Short
Liquidity ratios
term
Operating cash cycle (OCC)
Other ratios

Ratios of structure
Long
Debt to equity ratios
term
Total assets to debt ratio

4/12 AnaMAriasAlvarez (University ofOviedo) Liquidity andsolvency analysis OpenCourseWare

 6.2.1: SHORTTERM FINANCIAL ANALYSIS.

a)LIQUIDITYRATIOS:

5/12 AnaMAriasAlvarez (University ofOviedo) Liquidity andsolvency analysis OpenCourseWare

 b)OPERATINGCASHCYCLE(OCC):

Purchase ofgoods Saleofgoods Cashreceived from

on credit on credit credit customers

60days

Inventoriesholding Settlementperiod
period fortrade
50days receivables
10days
Payment for
goods

Settlementperiodfor
tradepayables
20days 40days
The OCC is important when assessing the liquidity of a business. In the case of a commercial company,
it may be defined as the time period between the outlay of cash necessary for the purchase of goods
and the ultimate receipt of cash form the credit customer.

6/12 AnaMAriasAlvarez (University ofOviedo) Liquidity andsolvency analysis OpenCourseWare

 CALCULATINGTHEOCC

Average period Numerator Denominator

Inventories holding Average inventories held Cost ofsales
period
plus
Settlement period Average trade receivables Netsales
for trade receivables
minus
Settlement period for Average trade payables Netpurchases
trade payables

7/12 AnaMAriasAlvarez (University ofOviedo) Liquidity andsolvency analysis OpenCourseWare

 Task: try to solve problem 6.1.

8/12 AnaMAriasAlvarez (University ofOviedo) Liquidity andsolvency analysis OpenCourseWare

 c)OTHERRATIOS:

Equity+Noncurrentliabilities=
Noncurrentassets+ExistingWorkingCapital

Existing Working Capital=Required Working

Capital

Existing Working Capital>Required Working

Capital

ExistingWorkingCapital<RequiredWorking
Capital

9/12 AnaMAriasAlvarez (University ofOviedo) Liquidity andsolvency analysis OpenCourseWare

 6.2.2: LONGTERM FINANCIAL ANALYSIS.

a) RATIOSOFSTRUCTURE:
Noncurrent assets/Total assets
Current assets/Total assets
Asset
Inventories/Total assets
structure
Trade receivables/Total assets
etc.

Equity/(Equity + Liabilities)
Financial Liabilities/(Equity + Liabilities)
structure Noncurrent liabilities/(Equity + Liabilities)
Current liabilities/(Equity + Liabilities)
10/12 AnaMAriasAlvarez (University ofOviedo) Liquidity andsolvency analysis OpenCourseWare
 b) DEBTTOEQUITYRATIOS:

Longterm Noncurrent liabilites/Equity

Debt to equity Liabilities/Equity
Shortterm Current liabilities/Equity

c) TOTALASSETSTODEBTRATIO:

11/12 AnaMAriasAlvarez (University ofOviedo) Liquidity andsolvency analysis OpenCourseWare

 Task: try to solve problem 6.2.

12/12 AnaMAriasAlvarez (University ofOviedo) Liquidity andsolvency analysis OpenCourseWare