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Barrick Gold Financial Evaluation 2003-2005

Barrick Gold Financial Evaluation 2003-2005 - EVALUATION...

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EVALUATION Short term liquidity Barrick Gold’s short term liquidity seems to be in good condition overall. The only two areas that stand out as potentially problematic are the increase in inventory levels and days inventory held over the three year period from 2003 to 2005, and the resulting deterioration of the cash conversion cycle from 2004 to 2005. The following is a detailed analysis through the short term liquidity ratios. Current ratio and Quick ratio: Both the current and quick ratio increased from 2003 to 2004 and came back down again in 2005. However, they have stayed well above the 1.5 mark and 1 mark respectively, which are normally considered good levels for most industries. Hence, Barrick is well covered in terms of bring able to meet its short term cash requirements. The reason for the ratio increase in 2004 is an increase in current assets, which is due partly to an increase in inventories for the year. Current liabilities, on the other hand, increased only slightly between the two years. Inventory levels in 2004 could have been higher due to the decrease in sales for the year (leading to an increase in stockpiles) or in anticipation of higher sales / business expansion in 2005. For 2005, even though current assets (and specifically inventories) went up, the two ratios declined due to an accompanying increase in current liabilities, which could have been necessitated to keep up with rising sales. Inventories for the year seem to have risen for the same reason. Average collection period: The average collection period decreased between 2003 and 2005 because of declining accounts receivables over these years, which is good news for Barrick. The increase in revenue for 2005 was partly responsible for the result in that year, where as even though revenue went down in 2004, the decreasing A/R still lowered the ratio. Industry comparables (Gold Corp Inc.) show that 14 days is the average collection period for the gold mining industry, which shows that Barrick’s A/R is improving in terms of liquidity year by year. Days inventory held: This ratio increased over the three years under analysis mainly because inventories increased over these years. For 2004, this was also brought about by the cost of goods sold decreasing. And even though COGS increased in 2005, the higher inventories still managed to lower the ratio. 5
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Inventory levels seem to have risen in 2004 due to lower sales for the year and seem to have kept rising in 2005 to keep up with higher sales. However, Barrick must keep these levels in check in order to prevent their liquidity from deteriorating. The industry comparable (Gold Corp Inc.) is 208 days for 2005 and 30 days for 2004, indicating an industry wide trend for the increase in this ratio. Also, even though it is understandable for an industry such as gold mining to generally take longer periods of time to sell or liquidate their inventories than most other industries, Barrick seems to be doing well compared to it competitors.
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Barrick Gold Financial Evaluation 2003-2005 - EVALUATION...

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