indicated positive signals for working capital management. Accordingly, receivables payment period fell to 25 days and payables payment period increased to 50 days showing that Marshalls tightened its credit policy and prolonged its payment period to creditors. However, working capital cycle was five days longer than last year (116 days in 2008 in comparison to 111 days in 2007) which was mainly affected by the inventory turnover. 14 (days) 1 8 0 1 6 0 1 4 0 1 2 0 1 0 0 8 0 6 0 4 0 2 0 0 2007 2008 2009 2010 Inventory holding period 126 141 155 141 Receivables payment period 33 25 25 22 Payables payment period 48 50 54 56 Working capital cycle 111 116 126 107
In 2009, inventory holding period was longer, rising to 155 days. Although inventories had decreased by £7 million, cost of sales decreased at an even faster pace. A nearly £40 million decrease in cost of sales reflected weak sales and the result of Marshalls cost saving strategy. Accordingly, receivables payment period remained at the same level as in the year before, payables payment period was longer. In 2009, working capital cycle was 10 days longer than that of 2009 (126 days in 2009 in comparison to 116 days in 2008). 126 days of working capital cycle might indicate that the company’s working capital management is not sufficiently as well. In 2010, the situation improved. Inventory holding period fell from 155 days to 141 days. The economic upturn cont ributed to better sales and a £20 million increase in cost of sales. Inventories decreased slightly showing that the company has matched its inventories to the improved market conditions. As for receivables and payables management, the company made progress in further shortening receivables payment period and extending payables payment period. And the result of 107 days working capital cycle showed that Marshalls used its working capital efficiently. 2.4. Gearing analysis A company's capital structure describes the composition of its long-term capital, which usually consists of a combination of long-term borrowing (debt) and equity. Debt comes in the form of bonds or long-term notes payable, whilst equity is classified as common stock and retained earnings. “ Analysing the manner in which a business is financed is cardinal in ascertaining the risks associated with investing in or lending to it. A company heavily financed by debt poses greater risk partly because the increased borrowings increase the amount of money which must be found to service the debt. Borrowing also affects the volatility of shareholders return on investment depending on the business cycle.” (Stewart 2011, AFF Handout) In evaluating Marshall’s capital structure over the last four years, gea ring ratio, which is a proportion of long-term borrowing to total finance is employed. 15
The effects of gearing on Marshalls cash flows is measured using the interest cover ratio, which is the amount of profits before interest and tax divided by the interest charge for the year.