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ACC1002 [V08]
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Dairy Farm
Founded in 1886, mainly “family-run” business
Have many stores all over world, especially Asia
Products ranging from food to healthcare
Healthy growth, sustainable
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Contents
1) Working Capital Management (W.C.M.)
2) Key Liquidity and Efficiency Ratios
3) Conclusion to W.C.M.
4) Examples of Provisions & Their Reliability
5) Examples of Contingent liabilities & Their
Reliability
6) Overall Conclusion
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Working Capital
Management
Overall
Conclusion
Key RatiosConclusion to
W.C.M
Provisions &
Reliability
Contingent Liability
& Reliability
Working Capital Management
Decisions relating to working capital and short
term financing
Relationship between firm's current assets andcurrent liabilities
Ensure continual operations and sufficiency of
cash flow
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Year 2011 2010 2009 Working
Capital
(US m)
-412.3 -405.8 -316.5
Working Capital
Current assets Current liabilities
Working Capital
Management
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Key Liquidity & Efficiency Ratios
1. CurrentRatio
2. % of CurrentAssets that are
Inventories
3. Acid Test
(Quick Ratio)
4. Cash
ConversionCycle
Working Capital
Management
Overall
Conclusion
Key RatiosConclusion to
W.C.M
Provisions &
Reliability
Contingent Liability
& Reliability
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Current ratio < 1
Working capital is negative
1. Current Ratio
Average Current Ratio
0.818
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Dairy
Farm
Sheng
Siong
Carrefour Industry
2011 0.825 1.84 0.741.2 - 1.5010 0.804 1.28 0.71
2009 0.825 2.02 0.71
1. Current Ratio
Consistent current ratio
Proper management of resources and funding
Key Ratios
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Key Liquidity & Efficiency Ratios
1. CurrentRatio
2. % of CurrentAssets that are
Inventories
3. Acid Test
(Quick Ratio)
4. Cash
ConversionCycle
Working Capital
Management
Overall
Conclusion
Key RatiosConclusion to
W.C.M
Provisions &
Reliability
Contingent Liability
& Reliability
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2011 2010 2009% of total assets
which are
inventory
26.8% 25.1% 25.1%
% of current
assets which are
inventory
48.8% 49.2% 47.7%
2. % of Current Assets that are Inventories
Close to half of current assets being inventories
Too much? Good working capital management?
Key Ratios
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2. % of Current Assets that are Inventories
Nature of the business
DF has to stock up more = Huge inventories
Inventories are quickly converted quickly to cash
Quick RatioCash conversion cycle
Key Ratios
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Key Liquidity & Efficiency Ratios
1. CurrentRatio
2. % of CurrentAssets that are
Inventories
3. Acid Test
(Quick Ratio)
4. Cash
ConversionCycle
Working Capital
Management
Overall
Conclusion
Key RatiosConclusion to
W.C.M
Provisions &
Reliability
Contingent Liability
& Reliability
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3. Quick Ratio
Liquid assets Current liabilities
2011 0.422
2010 0.408
2009 0.432
Key Ratios
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3. Quick Ratio
2011 0.422
2010 0.408
2009 0.432
Measures the ability of company to use quick assetsto pay off current liability immediately
Key Ratios
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Dairy Farm Sheng Siong Carrefour Industry
2011 0.422 1.45 0.25
0.8010 0.408 0.987 0.20
2009 0.432 1.74 0.32
3. Quick Ratio
Low liquidity ratio may not be unhealthy:
- High inventory turnover rate
- Fast payment from customers
- Long terms from suppliers
Key Ratios
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Key Liquidity & Efficiency Ratios
1. CurrentRatio
2. % of CurrentAssets that are
Inventories
3. Acid Test
(Quick Ratio)
4. Cash
ConversionCycle
Working Capital
Management
Overall
Conclusion
Key RatiosConclusion to
W.C.M
Provisions &
Reliability
Contingent Liability
& Reliability
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Cash Conversion Cycle (CCC)
Days’ sales uncollected (DSU)
Days’ sales in inventory (DSI)
Days’ purchases in /P (DPP)
4. Cash Conversion Cycle
Key Ratios
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Days’ sales uncollected (DSU) =
Days’ sales in inventory (DSI) =
Days’ purchases in /P (DPP) =
4. Cash Conversion Cycle
Key Ratios
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Why negative CCC?
Lower receivables collection period- Frequent customer billing, automatic electronic
transfers
Increase payables- Trade credits, pay suppliers slowly
4. Cash Conversion Cycle
Key Ratios
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Dairy Farm more efficient in managingworking capital
Inter-industry comparison
Industry Average: 10-15 days
Dairy Farm: -59.78 days
4. Cash Conversion Cycle
Key Ratios
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Conclusion to Working Capital Management
Low current ratio- Dairy Farm invests in new stores, does not leave
current assets idling
High inventories turnover which are dealt in cash
Working Capital
Management
Overall
Conclusion
Key RatiosConclusion to
W.C.M
Provisions &
Reliability
Contingent Liability
& Reliability
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Obligation due to past event;
Outflow is probable & can be reliablyestimated
Timing & amount is uncertain
Provisions
Working Capital
Management
Overall
Conclusion
Key RatiosConclusion to
W.C.M
Provisions &
Reliability
Contingent Liability
& Reliability
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Provisions
DeferredTax
Liability
IncomeTax
Pension
Liabilities
Provisions &
Reliability
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IncomeTax
Provisions
Provisions &
Reliability
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2009
• Additional provision = 3.2
• Under provision of tax = 0.3
2010• Additional provision = 5.2• Over provision of tax = 3.2
2011• Additional provision = 5.5• Over provision of tax = 0.4
Provisions
Dairy FarmProvisions &
Reliability
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Reliability of Provisions
EstimatesExpertise of
Experts
AdequateKnowledge on
Types ofProvision
Provisions &
Reliability
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May not provide for sudden shocks like
financial crisis or adjustments to policies
Reliability of Provisions
Provisions &
Reliability
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Possible obligation due to past event,
confirmed by future events;
Outflow not probable and/ or
Outflow not measurable
Contingent Liabilities
Working Capital
Management
Overall
ConclusionKey Ratios
Conclusion to
W.C.M
Provisions &
Reliability
Contingent Liability
& Reliability
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Financial Guarantee Contracts
Litigation
Environmental damagesInsurance losses
Government investigation
Possible tax assessments
Contingent Liabilities
Contingent Liability
& Reliability
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Financial Guarantee Contracts
Contingent Liabilities
Contingent Liability
& Reliability
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Careful evaluation of
guarantees
Default of loansunforeseeable
Non-disclosure
FinancialGuarantee
Contracts
Drawing on theexpertise of its
lawyers
Confident of winningmost lawsuits
Immateriality
Litigation
Reliability of Contingent Liabilities
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Reduction of negative impact
Costs needed to compensate for damages
Adequate efforts to avoid incurringcontingent liabilities
Reliability of Contingent Liabilities
Environmental
Damages
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• Dairy Farm (2009, 2010, 2011) Annual Reporthttp://www.dairyfarmgroup.com/shareholder/reports.htm
• Sheng Siong (2009, 2010, 2011) Financial Statementhttp://www.shengsiong.com.sg/pages/Investor-Relations.html
•
NTUC (2009, 2010, 2011) Annual Reporthttp://www.ntuc.org.sg/wps/portal/up2/home/searchResults?searchString=annual%20report
• NGFL WALES Business Studies A Level Resources (2008) RatioAnalysis—Liquidity Ratios http://www.ngfl-cymru.org.uk/liquidity__ratios.pdf
• Riley, J. (2012) Working capital - why a business needs ithttp://www.tutor2u.net/business/finance/workingcapital_needs.htm
References