Working Capital and Maturity Cycles: A 2007-2008 Financial Analysis

This analysis delves into the financial performance of the company for the years 2007 and 2008, focusing on key liquidity and operational efficiency metrics such as working capital and various maturity periods.

Working Capital Calculation (2007-2008)

The working capital is calculated as the difference between current assets and current liabilities. Here are the results for 2007 and 2008:

• 2008: Current Assets (2,788,286) - Current Liabilities (3,020,313) = -232,027
• 2007: Current Assets (2,741,769) - Current Liabilities (2,953,480) = -211,711

Both periods show negative working capital. This indicates that the company's current liabilities exceed its current assets. The negative working capital remained almost constant across both years.

Analysis of Working Capital Implications

It is crucial to ascertain whether this consistent financial imbalance signifies solvency problems or if it reflects a specific operational model, such as a highly efficient supply chain or reliance on supplier credit. Further analysis is needed to determine the implications for the company's financial health and operational sustainability.

Average Maturity Periods Analysis (2008)

To gain deeper insights into the company's operational efficiency and cash conversion cycle, we calculate various average maturity periods for 2008.

Average Stock Period (PMM)

The Average Stock Period (PMM) measures the average number of days inventory is held before being sold. To calculate the PMM, we first determine the average stock balance, which is half of the sum of initial and final stock for 2008. We also consider the cost of sales and inventory variation.

• Inventory Variation: -3,110
• Purchases: 2,471,866
• Cost of Sales: 2,468,756

The PMM is calculated as follows:

PMM = (Average Stock / Annual Cost of Sales) * 360

PMM = (((Initial Stock + Final Stock) / 2) / Cost of Sales) * 360

PMM = (((168,348 + 117,454) / 2) / 2,468,756) * 360 = 20.84 days

Average Collection Period (TMC)

The Average Collection Period (TMC), also known as Days Sales Outstanding (DSO), indicates the average number of days it takes for a company to collect payments from its customers after a sale. It is calculated using the average customer balance and net sales turnover.

TMC = (Average Customer Balance / Net Sales) * 360

TMC = (((1,505,783 + 1,398,898) / 2) / 4,008,777) * 360 = 130.42 days

Average Payment Period (TMP)

The Average Payment Period (TMP), or Days Payable Outstanding (DPO), measures the average number of days a company takes to pay its suppliers. This calculation uses the average supplier balance and total purchases.

TMP = (Average Supplier Balance / Purchases) * 360

TMP = (((Initial Supplier Balance + Final Supplier Balance) / 2) / Purchases) * 360

Note: The provided data for average supplier balance appears to be a sum of multiple balances. We will use the sum as provided in the original calculation.

TMP = (((1,654,936 + 418,866 + 1,652,675 + 308,376) / 2) / 2,471,866) * 360 = 293.88 days

Economic and Financial Maturity Cycles

These periods combine the previously calculated metrics to provide a comprehensive view of the company's cash conversion cycle.

Economic Maturity Period (PMME)

The Economic Maturity Period (PMME) represents the total time, in days, that a company's capital is tied up in its operating cycle, from the acquisition of raw materials to the collection of cash from sales.

PMME = PMM + TMC

PMME = 20.84 + 130.42 = 151.26 days

Financial Maturity Period (PMMF)

The Financial Maturity Period (PMMF), also known as the Cash Conversion Cycle (CCC), indicates the time it takes for a company to convert its investments in inventory and accounts receivable into cash, taking into account the time it takes to pay accounts payable.

PMMF = PMME - TMP

PMMF = 151.26 - 293.88 = -142.62 days

A negative PMMF is significant. It implies that the company receives cash from its customers before it has to pay its suppliers. This means the company is effectively financing its working capital through supplier credit. This can be a strong indicator of efficient working capital management, as it suggests that the company's operations generate cash rather than consume it. It also implies that short-term investments (such as inventory and treasury) and a portion of long-term investments are being covered by this favorable cash flow cycle.

Necessary Working Capital (FMNec) for 2008

The Necessary Working Capital (FMNec) represents the minimum amount of working capital a company needs to finance its operating cycle, considering its sales, costs, and payment/collection terms. It helps assess the liquidity required for day-to-day operations.

The formula for FMNec is:

FMNec = (Cost of Sales / 360) * PMM + (Sales / 360) * TMC + Treasury - (Purchases / 360) * TMP

Applying the values for 2008:

FMNec = (2,468,756 / 360) * 20.84 + (4,008,777 / 360) * 130.42 + 500,000 - (2,471,866 / 360) * 293.88

FMNec = 143,080.00 + 1,452,980.00 + 500,000 - 2,018,000.00 (approximate intermediate values)

FMNec = 77,749.73 thousands of euros

The treasury balance of 500,000 is notably high. This substantial amount is likely maintained to cover all short-term debt maturing within the month and to ensure liquidity for remaining operational payments, reflecting a cautious financial management approach.