Netforce Security (Pty) Ltd Financial Analysis and Liquidity Evaluation
Introduction
Netforce Security (Pty) Ltd recently released its balance sheets for the financial years 2022 and 2021, along with an abbreviated income statement for 2022. This data provides insight into the company's financial health, particularly in terms of liquidity and efficiency.
Financial Data
Assets 2022 2021
Non Current/Fixed 7,000,000 6,000,000
Inventory 500,000 300,000
Receivables 450,000 420,000
Cash 650,000 80,000
8,600,000 6,800,000
Equity and Liabilities
Share Capital (R2 shares) 5,000,000 4,400,000
Share premium 200,000 100,000
Retained Income 700,000 400,000
Long term Debt 2,000,000 1,000,000
Payables 700,000 900,000
8,600,000 6,800,000
Income Statement
Sales (50% on credit) 3,000,000
Cost of sales (80% on credit) 2,000,000
Depreciation 120,000
Interest Expense 80,000
Net Income before Tax 900,000
Dividends 330,000
Retained Income 300,000
Financial Analysis
1.1 Calculate the following ratios for 2022 and comment. Ratios for 2021 are given in brackets.
1.1.1 Current ratio
Current ratio = Current Assets / Current Liabilities
Ratio for 2022 = 1.56:1 (0.89:1 in 2021)
1.1.2 Acid test ratio
Acid test ratio = (Current Assets - Inventory) / Current Liabilities
Ratio for 2022 = 1.04:1 (0.56:1 in 2021)
1.1.3 Debtors collection period
Ratio for 2022 = 30.5 days (81 days in 2021)
1.2 Calculate the accounts payable period (in days) considering a 90-day account secured with all creditors. Ratio for 2022 = 127.75 days.
1.2.1 Netforce Traders' accounts payable period is higher than its accounts receivable period (30.5 days). This indicates a cash flow mismatch and calls for improved credit management and payment terms.
1.3 Comment in detail on the liquidity of the company.
Netforce Traders' liquidity position has improved between 2021 and 2022. The company has strengthened its current and acid test ratios, indicating better liquidity. However, the accounts payable period has increased, signaling a need for enhanced cash flow management.
1.1 - What is the significance of the current ratio and acid test ratio in assessing a company's financial health? 1.2 - How can Netforce Traders improve their accounts payable period management? 1.3 - Why is it important for companies to maintain a balanced liquidity position? 1.1 - The current ratio and acid test ratio provide insight into a company's ability to meet short-term obligations and cover immediate liabilities, respectively. A higher ratio indicates better liquidity and financial stability. 1.2 - Netforce Traders can enhance their accounts payable period management by negotiating better payment terms with creditors, optimizing inventory turnover, and implementing efficient credit control policies. 1.3 - Maintaining a balanced liquidity position ensures that a company can meet its financial obligations, seize growth opportunities, and withstand unforeseen economic challenges. It reflects the company's ability to manage cash flow effectively and sustain long-term operations.