Unformatted text preview: ing current assets (A/R and Inventory)
– Increase in fixed assets
– Buyout of Holtz’s equity stake
How is it being financed? – Operating CF
– Increase in payables
– Bank loan
– Buyout financing 13 Analysis of Working Capital
The increases in A/R and Inventory are major causes of the need for financing. Is this is just due to sales growth?
Collection Period (assume all sales on credit)
Collection period 1994 1996* 9.7 8.9 9.3 37.6 41.1 39.5 *using forecasted sales & avg (AR95 , AR96Q1) Q1 AR are low than the annual average because of cyclical
sales peak in next quarter. Thus, this understates the CP.
The increase in AR is due mostly to sales growth, but also
to a longer collection period.
14 Analysis of Working Capital
Inventory Period 1993 1994 1995 1996* Inventory Turnover 6.6 6.9 6.7 5.4 Inventory Period 55 53 54 67 *using Q1COGS*4 & avg (Inv.95 , Inv.96Q1) Seems that inventory turnover is falling in 1996, but
inventory is high because of cyclical sales peak in next
quarter. Thus, the inventory period is overstated in our
The inventory period stays constant over time.
15 Analysis of Working Capital
Payables period 1995 1996* 9.5 9.6 8.6 38.3 38.2 42.3 *using Q1COGS*4 & avg (AP95 , AP96Q1) Clarkson is stretching its payables, that is, relying more on
trade credit to finance its operations. Borrowing from
suppliers, which is more expensive than borrowing from a
bank, is typical of firms that are credit constrained.
16 Analysis of Working Capital
1994 1995 1996* Operating Cycle 90 95 107 Cash Cycle 52 56 64 In summary, Clarkson indeed appears to need cash due
to rapid sales growth
This rapid sales growth causes higher AR and inventory
which, together with the firm’s credit constraint that forces it
to borrow from suppliers, leads to a longer cash cycle.
17 Productivity of Fixed Assets
Net fixed assets / Sales gives you the net fixed assets used per dollar of sales generated. Lower numbers indicate higher productivity of the net property, plant, and equipment. Net property / Sales 1993
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- Spring '13
- Working Capital, Clarkson