HABBERS LIMITED:
Proportion of debt that has variable interest
		3225/5650	57%	1600/4025	40%
Overdraft interest at 5%		3225*.05	161	1600*.05	80
Bond interest rate		2425*.08	194	2425*.08	194
			355		274
Proportion of interest payments variable
			45%		29%
Interest cover
PBIT/interest		2992/355	8.4	2939/274	10.7
Long term debt-equity ratio		2425/12432	20%	2425/11325	21%
total debt/equity		5650/(12432)	45%	4025/11325	36%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QUESTION 3

 

(a)

			2015			2014
			days			Days
RECEIVABLES	5000/35000*365	52.14	53	2760/26400*365	38.16	39
INVENTORY	2400/25000*365	35.04	36	1620/19000*365	31.12	32
PAYABLES	4020/25000*365	58.69	59	4560/19000*365	87.6	88
`WC cycle			30			-17

 

 

 

1. Harrington’s short-term liquidity position seems to have improved with a rise in both the current and quick ratios.
2. Whilst liquidity has improved it will need to be monitored closely as the company has gone from having a positive cash balance of $60k to a bank overdraft of $1,380k. The improvement is therefore down to the increase in receivables which have increased in relation to revenue (2015: 14.3% of revenue; 2014: 10.5% of revenue).

• Trade receivable days have increased from 39 to 53 days, meaning that it is taking longer to collect income due. Harrington should therefore monitor its trade receivables days and ensure that these are collected or there may be a risk of over-trading.

1. Trade payable days have fallen from 88 to 59 days, trade payables having fallen in relation to cost of sales, indicating that Harrington is taking less time to pay its suppliers. This may allow them to maintain good relations with suppliers, and/or take advantage of early payment discounts but is being financed by the bank overdraft as it is taking longer to collect receivables.
2. The company has issued an additional $7,000k in loan notes which it would appear to have used to finance the purchase of non-current assets. This has increased gearing from 19.35% to 37.86%.  This is still at an acceptable level.
3. The ability of the company to cover the increased level of interest due on the loan notes should be monitored

• A cash flow statement would be useful to see the quality of the earnings generated and the availability of cash from operations to meet the interest payments.

 

	Workings	2015	Workings	2014
Current ratio	7,400/5,400	1.37:1	4,440/4,560	0.97:1
Quick ratio	(7,400 – 2,400)/5,400	0.92:1	(4,440 – 1,620)/4,560	0.62:1
Gearing	10,600/(17,400 + 10,600) x 100	37.86%	3,600/(15,000 + 3,600) x 100	19.35%

 

 

 

 

 

 

 

 

 

 

QUESTION 4

 

liquidity or working capital
receivable days
receivables balance *365	105.00	38.13	39	80.00	29.49	30
turnover	1005.00		Days	990.00		Days
payable days
payables *365	20.00	73.00	73	10.00	38.42	39
cos	100.00		Days	95.00		Days
inventory days
inventory *365	35.00	127.75	128	30.00	115.26	116
cos	100.00		Days	95.00		Days
WC cycle			94			107
Receivables plus inventory less payable days			Days			Days
current ratio
current assets	210.00	1.27:1		190.00	1.46:1
current liabilities	165.00			130.00
quick ratio
current assets less inventory	175.00	1.06:1		160.00	1.23:1
current liabilities	165.00			130.00
comment on ratios and statement of cash flows
liquidity has declined slightly but is quite healthy – but knowledge of industry norms would be useful
working capital cycle has improved – but mainly due to taking longer to pay creditors
receivables are taking slightly longer to pay, and higher inventory levels are being kept. This may be intentional, otherwise need to ensure credit procedures effective and inventory holding costs not increasing unnecessarily
cashflow shows that $475 generated from activities, which needs to be compared with the profits generated
Cashflow analysis shows that an additional net $110 was invested in non-current assets. This may have a beneficial effect on profits in the future
Cash used to repay long term liabilities – reduce interest costs
Small reduction in cash holding from last year to this.
Profit generation fairly consistent year on year