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NORTH SOUTH UNIVERSITY


Group: Turning Point
Fin-340.4

Submitted By,
NAME ID
IMAM IQRAMUL HASAN 142 0493 030
MD. IFTAKHARUL HAQUE FAHIM 151 1495 030
MD. FAHIM BIN SHAHID 151 0891 030

Submitted To,
Mr. Shahran Abu Sayeed
Lecturer,
Department of Accounting & Finance
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First of all we are very much grateful to almighty Allah for giving us the patience and the ability

to work hard with tremendous devotion

We would also like to accept this opportunity to express our sincere gratitude to those people

without their blessing and cooperation this project would not have been possible.

We are highly grateful to Mr. Shahran Abu Sayeed (ASY), Course Instructor, Department of

Accounting & Finance, and North South University for his devoted guidance, constant and

constructive encouragement to complete this project effectively & efficiently.


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Table of Contents
Introduction......................................................................................................................................1
Analysis Of Relevant Liquidity Measure ........................................................................................6
Analysis Of Relevant Solvency Measure ........................................................................................9
Summary of Liquidity & Solvency Measure.................................................................................17
Calculating NPV & Credit Policy..................................................................................................19
Conclusion: ....................................................................................................................................22
Reference……………………………………………………………..………………………….23
Appendix
1

Part-A

Introduction:

Fu-Wang Foods limited is a concern of Fu-Wang Group Bangladesh. It is public listed company
with joint stock of exchange of Bangladesh. Fu-Wang foods limited commenced its commercial
production in August 1997 and achieved ISO-9002 certification on 4th November 1998.Fu-Wang’s
Manufacturing enterprises producing a comprehensive range of food items like Bread, Biscuit
,Cake, Toast, Wafer Bar, Chocolate, Instant Noodles, Drinking water, Carbonated Drinks, Energy
Drinks etc. Fu-Wang foods have more than 200 products option, three hundred fifty dealers more
than dozen of chain shop, Eight numbers of branches and residential offices all over the
Bangladesh.24 hours supervision of foreign technician for producing quality. Imported Taiwan,
Italian Machinery, good quality raw material confirming its customer satisfaction. The Company
also has developed state of art laboratory to new product continuously.
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Credit Policy of Fu-Wang Food:

Fu-Wang makes well-written, comprehensive credit policy communicates a consistent standard


to customers. It documents and supports corporate goals, clarifies authorization levels, defines
expectations and responsibilities and enhances cross-functional cooperation especially between
the credit and sales departments. But Fu Wang food provides losses credit policy to their
customer and having higher receivables and day’s sale outstanding. The company strives to have
a consistent and courteous approach to collection in order to avoid any necessary to engage in
dunning activities.

1. Account with higher open invoices shall be called one week prior to the due in order to
assure the invoice is scheduled for payment. If there any discrepancy they will be
discussed and solved.
2. If no payment is received after three calls, the sales representative will be asked to
contact the customer.
3. All customers will be invoiced on the same day as the shipment is sent. Invoice shall be
sent separately from the shipment. Whenever possible, electronic invoicing will be used.
4. Customer will be contracted two weeks after shipment in order to ensure the shipment
arrived without damage and to check for any discrepancy with the invoice.
5. Account will be called when they are one week past due and calls will continue weekly.
6. If an account is 30 days late, pre-collection services will be ordered from the credit
collective.
7. If there is still no response the account is considered for the third-party collection of legal
action.

Terms of Sale:
Fu-Wang followed standard term of sales of customer. Fu-Wang has been established as Net 30
days. All credit worthy customers is expected to pay within this period. Any exceptions must be
based on competitive practices in accordance with established procedures. Company is seeking
longer terms will be subject to closer scrutiny. This policy will be reviewed on an annual basis.
For this policy they are taking prudent risk and so they most likely to check creditworthiness of
their customers. This personal information may include:
1. The type and amount of credit sought in an application made to us or another credit
provider or that you have offered to act as guarantor in respect of an application for credit
and trading arrangement.
2. Identification details such as your name, birth date, and driver’s license number,
address(s), telephone number(s) and other contact details.
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3. In respect of that default information, advice about new payment arrangements or that
those payments are no longer overdue.

4. Details of your current and previous credit providers.

5. Certain terms and conditions of particular credit arrangements.

6. Start and end dates of particular credit arrangements.

Sources of Short-term Working Capital:


Some of the Major sources to meet requirements of Short-Term Working Capital are
1. Trade credit
2. Accounts payable or Notes payable
3. Accounts Receivable

Sometimes borrowing from short term sources is very convenient way of financing rather than
own investment. By the help of borrowing from short term sources we can finance the temporary
expansion of floating assets. It is regarded as a sound financial policy to use short-term credit to
expand circulating assets (variable working capital) because these assets will be converted into
cash in the near future. Short term finance is also required for paying operating or operation
business expenses like salaries, wages, repairing expenses, rent etc.

Accounts Receivables Financing:


Here, we can see from the data of 2013 to 2017 of Fu Wang Food Company Ltd. accounts
Receivables are increasing. In 2013 total amount of the account receivable was 134991873 Take
and continuously increasing like a trend and in 2017 it increased to the amount of 329090196
Taka. So, the average collection period is getting longer. When the turnover ratio is increasing,
the problem might indicate a downturn in the economy or in a particular industry. Companies
that are having cash flow problems tend to remit payments later than those with an adequate
cash flow. The danger for the company is that if customers do not pay on time, Fu Wang Food
Ltd. may have trouble paying the vendors on time because of lack of money. The problem may
also be caused by a difference between the terms and the industry standard. If most companies
in the industry offer customers the ability to pay invoices in 45 days, the customers may fail to
respect that the terms allow only 20 days remitting payment. If our company lessens its efforts
to collect past-due accounts, then the company should also see the results the accounts
receivable turnover rates. The company might want to review their credit policies; if they have
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begun accepting accounts that are not as credit-worthy as previous clients were, then the
company might see a negative impact on your turnover rates.

Trade Credit:
Trade credit from supplier provide spontaneously generated source of financing. Trade credit is
the credit extended by one trader to another for the purchase of goods and services. Trade credit
facilitates the purchase of supplies without immediate payment. Trade credit is commonly used
by business organizations as a source of short-term financing. It is granted to those customers
who have reasonable amount of financial standing and goodwill. There are many forms of trade
credit like Cash in advance, Cash on delivery, Cash term, Prox, Seasonal dating, Consignment etc.
Various industries use various specialized forms. They all have, in common, the collaboration of
businesses to make efficient use of capital to accomplish various business objectives. Effective
use of trade credit requires intelligent planning to avoid unnecessary costs through forfeiture of
cash discounts or the incurring of delinquency penalties. But every business should take full
advantage of trade that is available without additional cost in order to reduce its need for capital
from other sources. Fu Wang Food Company now a day needs to pay the suppliers more. Because
the suppliers make the credit policy more strict day by day. So, the company needs to pay more
and pay within the credit limit which has become lower than before.

Accounts Payables:
A short-term liquidity measure used to quantify the rate at which a company pays off its
suppliers. Accounts payable turnover ratio is calculated by taking the total purchases made from
suppliers and dividing it by the average accounts payable amount during the same period. Fu
Wang Food Ltd has the larger payables from 2013 to 2017. The data we have collected for our
company gives us this interpretation.
The first possible implication of large accounts payable – although it is not always the case – is
that a company does not have sufficient cash-flow to cover its purchases. A high proportion of
debt to fully owned assets can be a sign that a company does not actually own much of what it
considers assets, including the goods they have for sale. This creates the possibility of inventory
being repossessed if the company struggles to make payments. Companies with lower debt-to
assets valuations own more of their assets, and are more likely to purchase assets with cash
Large accounts payable is not always a sign of poor cash flow. A large percentage of debt to sales
can indicate a company is in the early growth stages of the business life cycle. Businesses in
certain industries have to take on significantly more debt than others simply to get off the
ground. Technology companies, for example, often have long up-front research and development
(R&D) cycles that rack up a lot of debt before the company sells a single item, which is not
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necessarily a bad sign in this industry. This same concept can apply to accounts payable for
companies relying on high-priced raw materials, components or finished goods inventory.

Company’s Investment in Marketable Securities:


Yes, Fu Wang Food Company has the marketable securities. Because here we see that the
company has the cash and equivalents together. So, by observing the data we can conclude that
Fu Wang Food Ltd has the marketable securities, but as the both data cash and equivalents are
given together we cannot assure the amount specifically that how much the cash and how many
the equivalents are used. So, we cannot conclude how much the marketable securities are used
in this Fu Wang Food Company Ltd.
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Part-B
Analysis of relevant liquidity measures:
Liquidity Ratio: Liquidity ratio is a class of financial metrics that is used to determine a
company’s ability to pay off its short-term debts and obligations with its cash or equivalent liquid
assets. Generally, the higher the value of the ratio is larger the margin of safety that the company
possesses to cover short term debts would be. But it often varies depending on situations and
other factors.
Cash Conversion Efficiency: The cash conversion cycle is a cash flow calculation that attempts
to measure the time it takes a company to convert its investment in inventory and other resource
inputs into cash. Converting revenues into operating cash flow (OCF) is essential to maximizing
shareholders wealth. Hence the proportion of sales that yield operating cash flow dubbed cash
conversion efficiency (CCE) is critical for firm’s long-term viability. CCE=Operating cash
flow/Revenues. The CCE of FU-WANG FOOD COMPANY LTD. for the last five years are
represented bellow.
Cash Conversion Efficiency of Fu-Wang Food Ltd.
Year 2013 2014 2015 2016 2017
CCE 0.075042957 0.045059483 0.060304105 0.047342317 0.025551327

Cash Conversion Efficiency

2017 0.025551327

2016 0.047342317

2015 0.060304105
Cash Conversion Efficiency

2014 0.045059483

2013 0.075042957

0 0.02 0.04 0.06 0.08

Interpretation: It measures converting revenues into operating cash flows (OCF) is important for
maximizing shareholders wealth. The cash conversion cycle looks at how quickly the company
turns its inventory into sales, and its sales into cash, which is then used to pay its suppliers for
goods and services. While the quick and current ratios are more often mentioned in financial
reporting, investors would be well-advised to look at this metric as a measurement of the true
liquidity of a company. CCE of Fu-Wang food was the highest in the year of 2013 with a value of
0.075.Later it followed a downward trend in 2014 and then upward in 2015 finally. But 2016 and
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2017 again going to downward. Low CCE is bad signal for the industry.
Cash Ratio: Cash Ratio is the amount of cash and short term equivalents a company has over
current liabilities. The cash ratio is an effective and quick way to determine if a company could
have potential short-term liquidity issues. If the cash ratio is under 1, this implies that the
company won't have enough cash on hand to pay off current liabilities.
Cash Ratio= Cash ÷ Total assets

Cash ratio of Fu-Wang food ltd.


Year 2013 2014 2015 2016 2017
Cash Ratio 0.018167048 0.025761096 0.02011255 0.005407351 0.009452678

CASH RATIO OF FU-WANG FOOD LTD.

0.025761096

0.02011255
0.018167048

0.009452678
0.005407351

2013 2014 2015 2016 2017

Interpretation: The cash ratio is most commonly used as a measure of company's liquidity. The
metric calculates a company's ability to pay current liabilities using only cash and cash equivalents
on hand. If the company is forced to pay all current liabilities immediately, this metric shows the
company's ability to do so without having to sell or liquidate other assets.
Cash ratio is explained as the stock of cash held on the balance sheet scaled by total assets. The
cash ratio presents the proportion of assets held in cash. This is an essential measure used by
companies. In the above graph illustrates the cash ratio of Fu-Wang food. In 2013 to 2014 their
cash ratio increased by a little value. But in 2015 they going down their cash ratio. It also shows
that the highest cash holding on 2014 that increase both agency and opportunity cost of the
company. The situation was totally opposite when they had the lowest cash ratio on 2015 to
2017.

Cash Burn Rate: Cash holdings scaled by average daily cost of goods sold. This metric provides the
number of days the firm can finance. Increased burn rate implies a reduced likelihood of illiquidity. The
Cash Burn Rate of FU-WANG FOOD COMPANY LTD. for the last five years are represented
bellow.
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Year 2013 2014 2015 2016 2017


CBR 11.72415512 18.0322585 17.0103715 5.190110501 13.01426905

Chart Title
20
18.0322585
18 17.0103715
16
13.01426905
14
12
10 11.72415512
8
6
4 5.190110501
2
0
2013 2014 2015 2016 2017

Interpretation: Burn rate is normally used to describe the rate at which a new company is
spending its venture capital to finance overhead before generating positive cash flow from
operations; it is a measure of negative cash flow. Burn rate is usually quoted in terms of cash
spent per month. In the above graph illustrates the cash burn rate of Fu-Wang food. We can
clearly see that cash burn rate went down in the year of 2016 which means that the rate go down
in 5 which means that company had enough money on hand for 5 days funds of cogs and went up
till 2012 to 2015. After 2014 this ratio experienced a downward trend till 2015 to 2016. In 2014
this ratio was 18.032 days which was the highest cash ratio that implies a reduced likelihood of
illiquidity. On the other hand, this ratio experienced its lowest form with 5.190 days.

Net Liquidity Balance (NLB): Net liquid balance is the sum of cash and short term
investments minus current no spontaneous financial liabilities such as notes payable and current
maturing debt. A negative NLB depends on outside financing and suggest the minimum capacity
needed for the credit line but it doesn’t mean that the firm will face default obligation. It implies
reduce liquidity. The NLB calculated as
NLB= cash-notes payable
The NBL of FU-WANG FOOD COMPANY LTD. for the last five years are shown bellow.
Net Liquid Balance Of Fu-Wang Food Ltd.
Year 2013 2014 2015 2016 2017
NLB 19,445,912 30,380,089 27,015,840 8,014,797 14,952,745
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35,000,000
30,380,089
30,000,000 27,015,840

25,000,000
19,445,912
20,000,000
14,952,745
15,000,000

10,000,000 8,014,797

5,000,000

0
1
2013 2014 2015 2016 2017

Interpretation: Net liquid assets are a strict measure of an immediate or near-term liquidity
position of a firm, calculated as liquid assets less current liabilities. Liquid assets are cash,
marketable securities and accounts receivable that can be readily converted to cash at their
approximate current value. In the above graph illustrates the net liquid balance rate of Fu-Wang
food. In 2013 their net liquid balance was 19,445,912. It has increased in 2014. But in 2015 it had
a huge decrease which indicates that they are less able to pay the WCR after paying notes payable
and short-term debt in 2015-2017.

Analysis of relevant solvency measures:


There has a little bit misconception among the general people about the solvency and liquidity
measures. People used to think that both the concept of solvency and liquidity measures are the
same things. But, in real life, although solvency and liquidity are both terms that refer to a
company’s state of financial health, there are some distinctions between two of them. Whereas
liquidity refers to firm’s ability to meet to meet short term obligations with cash while remaining
a going concern, solvency refers to a firm’s capacity to meet its long term financial commitments.
In addition, solvency measurement let us know whether current assets exceed current liabilities.
A solvent company is one that owns more than it owes; in other words, it has a positive net worth
and a manageable debt load. On the other hand, a company with adequate liquidity may have
enough cash available to pay its bills. Solvency and liquidity are equally important, and healthy
companies are both solvent and possess adequate liquidity. A number of financial ratios are used
to measure a company’s solvency, the most common of which are discussed bellow
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Net Working Capital (NWC): the Net working Capital is the difference between the current
assets and the current liabilities which means NWC= Current Assets-Current Liabilities. Positive
NWC suggest that firm’s long term funds finance current assets. On the other hand, negative
NWC reveal that current liabilities assert the firm to finances long term asset. In addition, higher
value for NWC may indicate adequate solvency and low default risk of a company, as current
assets exceed current liabilities. The NWC of Fu-Wang for five years are shown bellow
Net working Capital(NWC) of Fu-Wang Food
Year 2013 2014 2015 2016 2017
NWC 275254170 386755454 505501810 512048228 583660911
Net Working Capital
700000000
583660911
600000000
505501810 512048228
500000000
386755454
400000000
275254170
300000000

200000000

100000000

0
1
2013 2014 2015 2016 2017

Interpretation: If we go through the graphical representation, we can state that the net working
capital of Fu-Wang Food has been being increased annually over the 2013 to 2017 with a positive
value. Fu-Wang Food LTD had a NWC of approximately 275.3 million and 583.7 million in 2013
and 2017 respectively. In fact, the investment in NWC is increased by 112.04% over the endpoints
of the period. According to these data we can presume that the managers of FU-WANG FOOD
LTD increasingly fund current assets with long term financing.

Working Capital Requirement (WCR): The Working Capital Requirement (WCR) is the
difference between the current operating assets & current operating liabilities. Where operating
current assets and operating current liabilities are accounts receivable, inventory, prepaid
expense and accounts payable, accruals respectively. These accounts represent spontaneous
uses and sources of funds generated over the working capital cycle. All other factors constant an
increased WCR suggests that the working capital cycle needs additional financing. Contrariwise,
a negative WCR implies that the working capital cycle provides financing for long term assets,
positively impact solvency. The WCR of FU-WANG FOOD LTD over five years are given bellow
according with a graphical representation.
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Working Capital Requirement


Year 2013 2014 2015 2016 2017
WCR 226922110 264493584 366988980 433782611 484525533

Working Capital Requirement

484525533
433782611

366988980
264493584
226922110

2013 2014 2015 2016 2017

Interpretation: The data table and the graph which are presented above showing us that the
WCR of FU-WANG FOOD LTD has been increasing since 2013. The FU-WANG FOOD LTD had a
Positive WCR of $226922110 which implies that more funds are tied in receivables and inventory
which is negatively impacting the solvency. Moreover, the WCR in 2013 indicates that FU-WANG
FOOD LTD, will require either internal or external funding in the amount of $226922110 to cover
the gap in the operating working capital. If we analyze the data carefully, we can see that the
WCR of FU-WANG FOOD LTD is increased by 113.5% over the endpoints of the period 2017. More
additional financing are needed to cover the gap in the operating working capital in 2017 than
any other year. In addition we can state the managers of FU-WANG FOOD LTD are not managing
the receivables & the inventory effectively and efficiently. As a result the CCP of the company will
be increased result in decreasing profitability in the long run.
Current Ratio (CR): The current ratio is generally used to provide an idea of a firm's ability to
pay back its liabilities (debt and accounts payable) with its assets (cash, marketable securities,
inventory, accounts receivable). It is one of the oldest financial ratio. There is a relationship
between the NWC & the current ratio. Like the NWC, increased values for the current ratio implies
improved solvency and less default risk. A ratio under 1 implies that a company’s liabilities are
higher than its assets and suggests that the company in question would not be able to pay off its
obligations if they came due at that point. Furthermore, a CR below 1 also tells us that the
company is not in good financial health, but, we have to keep it in mind that it does not necessarily
mean that the firm or company will go bankrupt. The higher the current ratio, the more capable
the company is of paying its obligations, as it has a larger proportion of asset value relative to the
value of its liabilities. But a current ratio more than 3 may be not a good scenario for some firms
which indicates that the firms are not using their current assets efficiently. We can obtain the
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current ratio through dividing the current assets by current liabilities. CR=Current assets ÷ Current
liabilities. FU-WANG FOOD’S current ratio as well as the trend in this ratio are shown bellow

Current Ratio
Year 2013 2014 2015 2016 2017
CR 2.0 2.47 2.55 2.32 2.52

Current Ratio
3 2.47 2.55 2.52
2.32
2.5 2.05
2
1.5
1
0.5
0

2013 2014 2015 2016 2017

Interpretation: FU-WANG FOOD LTD had a current ratio of 2.05 in 2013. If we observe the data
along with the graph, we can see that there is fluctuation trend in the current ratio of FU-WANG
FOOD LTD over the last five years. The current ratios are 2.05, 2.47, 2.55, 2.32, and 2.52 in the
year of 2013, 2014, 2015, 2016, and 2017 respectively. In 2015 the company had a highest
current ratio. The Current Ratio of the company was increasing from 2013 to 2015 but it faced a
downturn in 2016. In the next year, the company again come up with a higher current ratio than
the previous year. Except 2016, the company has an increasing trend in the current ratio which
positively impact the solvency of the company as well as reducing the default risk. This scenario
of FU-WANG FOOD LTD will attract the investors and the creditors much.

Quick Ratio (QR): Quick ratio also known as acid test ratio which is used to test the ability of a
business to pay its short-term debts.The quick ratio is an indicator of a company’s short-term
liquidity. It is used to measure firm’s ability to meet its short-term obligations with its most liquid
assets. Due to this consequence, where current ratio includes the inventory, the quick ratio
exclude the inventories from the current assets. We can easily obtain the Quick Ratio of a firm
through this equation. Quick ratio = (current assets – inventories) ÷current liabilities. A quick ratio
less than 1 does not necessarily mean that the firm is subject to default or bankruptcy, it may
imply that the firm is relying mostly on inventories or other assets to pay its short term
obligations. Higher the quick ratio, the better the firm's liquidity position. Anyway, we have to
keep it in mind that too high a quick ratio may suggests that the firm has too much cash sitting in
its reserves. As a result the firm will incur an opportunity cost. It may also indicate that the firm
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has a higher accounts receivables, implying that the company may be having problems in
collecting its account receivables.
QUICK RATIO OF FU-WANG FOOD LTD.
Year 2013 2014 2015 2016 2017
Quick Ratio 1.51 1.92 2.01 1.83 2

Quick Ratio
2.5

2.01 2
1.92
2 1.83

1.51
1.5

0.5

0
2013 2014 2015 2016 2017

Interpretation: the graph is showing us that the quick ratio of FU-WANG FOOD LTD over the last
five year is satisfactory enough to attract the investors and the creditors as quick ratio is greater
than one for each of the scenario. The quick ratio is increasing through the end of the each period
except in 2016. The company had the highest quick ratio in 2015. In addition we can state that
FU-WANG FOOD LTD will be able to meet its short-term obligations with its most liquid assets in
any given point of time.

Daily sales outstanding (DSO): Days sales outstanding (DSO) is basically a measure of the
average number of days that it takes a company to collect payment after a sale has been made.
DSO can be calculated by dividing the amount of accounts receivable during a given period by
the total value of credit sales during the same period, and multiplying the result by the number
of days in the period measured. A higher DSO number indicates that a company is selling its
product to customers on credit and taking longer to collect money. This may lead to cash flow
problems because of the longer duration between the time of a sale and the time the company
receives payment. A low DSO value means that it takes a company fewer days to collect its
accounts receivable which result in shorter cash conversion period. In effect, the ability to
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determine the average length of time that a company’s outstanding balances are carried in
receivables can in some cases tell a great deal about the nature of the company’s cash flow.

DSO OF FU-WANG FOOD LTD.


Year 2013 2014 2015 2016 2017
DSO 62.76 76.33 106.54 137.57 204.7

250

204.7
200

150 137.57

106.54
100
76.33
62.76

50

0
2013 2014 1
2015 2016 2017

Interpretation: A picture is worth a thousand words. This graph is telling us a lot of information
about the FU-WANG FOOD. This graph is telling us that the DSO of this company is going up over
the five years with an increasing trend. It simply means that FU-WANG FOOD LTD is not managing
its sales or account receivables efficiently. As a result their CCP will be widen subject to a bad
impact on the overall profitability of the company.
Days Inventory Held (DIH): The Days Inventory Held (DIH) is the average number of days’
inventory sits idle. The time laps between the acquisition of inventory and selling the item to a
customer. Also, given that Cost of Goods Sold (COGS) represents inventory production costs, the
DIH can be interpreted as the number of days of inventory held on a balance sheet at a given
point in time. DIH = Inventory / (COGS /365 Days). The higher the DIH of a firm or a company the
higher the CCP would be for the firm.
DIH OF FU-WANG FOOD LTD.
Year 2013 2014 2015 2016 2017
DIH 85.32 86.79 110.84 122.68 173.31
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DIH OF FU-WANG FOOD LTD.


200
173.31
180
160
140 122.68
110.84
120
100 85.32 86.79
80
60
40
20
0
1
2013 2014 2015 2016 2017

Interpretation: The day’s inventory held is the average number of days when inventory seats
idle. It is the time gap between inventories being ordered till the delivery of the item. From the
graph, we can easily illustrate that DIH increased slowly as the years passed by from 2013 to
2014. The ratio followed an upward trend from the year 2013-2017 and this ratio went very high
in 2015 and 2017. This ratio experienced it’s highest at the year 2017 with 173.31 days.
Days Payable Outstanding (DPO): Days payable outstanding (DPO) is a company's average
payable period that measures how long it takes a company to pay its invoices from trade
creditors, such as suppliers. The DPO of FU-WANG FOOD LTD. for the last 5 years are given bellow.
DPO OF FU-WANG FOOD LTD.
Year 2013 2014 2015 2016 2017
DPO 25.45 24.19 26.77 23.87 29.23

DPO OF FU-WANG FOOD LTD

29.23
25.45 26.77
24.19 23.87

2013 2014 2015 2016 2017


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Interpretation: To interpret this section we have to consider the overall market benchmark,
whether any discount rate is offered by the supplier or not. The higher the DPO of a company the
better the scenario for the company. Generally, lengthening the DPO will assert the company to
shorten the Cash Conversion Period result in maximizing profitability. The data table and the
graph are showing us that FU-WANG FOOD has a trend of fluctuating over the last five year. It
had a highest DPO in 2017 which indicates that greater efficiency in managing DPO in that
particular year. The company faced the lowest DPO in 2016.
Operating Cycle (OC): Operating cycle (OC) is the number of days a company takes in converting
its inventories into cash. It is equal to the time taken in selling inventories plus the time taken in
recovering cash from trade receivables. So we can simply state that OC= DIH+DSO. Operating
cycle normally indicates the operating efficiency and working capital management of a firm or a
company. A short operating cycle is good as it suggests that the company's cash is tied up for a
shorter period. On the other hand, a longer long operating cycle is not expected.

OPERATING CYCLE
Year 2013 2014 2015 2016 2017
OC 148.08 163.12 217.39 260.25 378.02

OPERATING CYCLE
378.02

260.25
217.39

163.12
148.08

2013 2014 2015 2016 2017

Interpretation: From the above graph, we can illustrate that the OC of FUWANG FOOD LTD. had
an upward slopping curve meaning the operating efficiency is declining over the period which
will be result in larger cash conversion period. But, if the DPO of this company along with DIH &
DSO go in the same parallel manner than the CCP of the company might not be affected. The
graph is showing us that the OC of this in 2013 was 148.08 days and after that the OC was being
increased till 2017. It has a highest OC in 2017 which is approximately 378 days. It indicates that
the operating cycle of the company was not managed efficiently in 2017.
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Cash Conversion Period (CCP): the CCP represents the time needed to convert $1 of cash of
disbursements into $1 of cash receipts. In addition, The CCP represents the length of time over
which management must arrange for non-spontaneous financing. Longer CCPs require increased
financial resources, reducing firm liquidity. A positive CCP implies that extra financing is needed
to fund the cash cycle. The CCP of a company can be found though out this equation,
CCP = OC – DPO = (DIH + DSO) – DPO
The CCP of FU-WANG FOOD LTD. for the last five years are represented bellow

CASH CONVERSION PERIOD


Year 2013 2014 2015 2016 2017
CCP 122.62 138.92 190.61 236.38 348.79

Cash Conversion Period


400
348.79
350
300
236.38
250
190.61
200
122.62 138.92
150
100
50
0
2013 2014 2015 2016 2017

Interpretation: The calculated CCP for the FU-WANG FOOD LTD. is telling us that the CCP of this
company is increasing over the periods. For every period the company has to provide additional
financing to fund its cash cycle. The calculated CCP suggests that it takes this company
approximately 122 & 348 days to turn the disbursement of cash into a cash inflow in 2013 & 2017
respectively. The graph is also showing us that the liquidity of this company has been reduced
over the last five years. If FU-WANG FOOD LTD. borrows money to fund the cash cycle than it
must incur opportunity cost result in reduced profitability. It’s a matter of concern that the
company’s CCP in 2016 & 2017 increased dramatically at higher rate.

Summary:
Relevant Liquidity Measures: The CCE of FU-WANG FOOD LTD. has fluctuated over the last 5 years.
The company’s fluctuation in CCE is tolerable for the company. The study suggests that the CCE is positive
18

for each year for the company, which implies that it doesn’t face problems in converting sales into cash
flow. 2013 holds the highest CCE among these five years. Meanwhile, it followed a downward trend in
2014.Finally in 2017 CCE of FUWANG FOOD LTD. had a huge downturn. Over the last 5 years companies
CR is fluctuating too much. But these 5 years cash comprise less than 1% of assets. The cash ratio reaches
its minimum in 2016. 0 50 100 150 200 250 2012 2013 2014 2015 2016 Cash Conversion Period
FUWNGFOOD 18 Over the last 5 years, 2014 is the highest CBR 18.032 days and 2016 is the lowest CBR
5.190 days. The cash burn rate 2016 implies that there is only enough cash on hand to fund 5.190 days of
COGS. The trend suggests that the firm depends on daily cash flows to cover COGS. In these last 5 years,
in 2014 had highest NLB and 2016 had lowest NLB consistent with the other cash materials, for the NLB
suggests that the firm doesn’t face difficulties in covering its short term financial obligations.

Relevant Solvency measure: FU-WANG FOOD LTD. has been maintaining a positive net working
capital (NWC) since 2013. The company has an increasing trend in the NWC over the last five
years (2013-2017). It had a NWC of approximately 275.3 million in 2013; which was later on
increased by 112.04% result in 583.7 million at the endpoint of 2017.this scenario implies that
Managers of this company increasingly current assets with long term financing. The trend in the
WCR suggests a substantial increase in net operating working capital over the last five years. For
each year, the observed WCR is showing that more funds is tied up in receivables and inventory
than is provided by spontaneous financing which is negatively impacting the solvency. The
company has an improving trend in its current ratio over the last five years except 2016. For each
$1 of current liabilities there was $2.52 of current assets during 2017. This scenario would attract
the investors and creditors. But we have to keep it in mind that if this increasing trend keep going
in the upcoming year it may not be a good scenario for the company. Much higher current ratio
indicates that the company is not using its current assets efficiently. Quick ratio is improving each
year except 2016, it is better for the company. But at the very recent year the quick ratio falls
down which is 2016(1.83). The DSO of FU-WANG FOOD is going up over the five years with an
increasing trend which simply means that the company is not managing its sales or account
receivable efficiently. In addition the trend in DIH of this company is also going in the similar
manner of DSO which implies that the company does not manage its inventory in an appropriate
manner. On the other hand the DPO of this company has been fluctuating since 2013. The
company had a highest DPO in 2017 which indicates the efficient management in DPO which will
assert the company to abridge the CCP. Finally, The CCP of the company is going up dramatically
high. It implies that the company has to provide additional financing to fund its cash cycle which
is subject to diminished profitability in the long run.
19

Part-C
CALCULATING NPV:
To calculate the NPV daily, we take the values of daily sales, daily COGS, DPO, DIH, DSO from
excel worksheet. I=10%.
NPV daily of FUWNG FOODS of total 5 years is given below
NPV DAILY 2013 2014 2015 2016 2017
420,036.33 409,680.62 543,279.00 427,581.97 316,942.61

600,000.00 543,279.00

500,000.00 420,036.33 427,581.97


409,680.62
400,000.00
316,942.61
300,000.00

200,000.00

100,000.00

0.00
2013 2014 2015 2016 2017
NPV daily

From the above graph, it is seen that the NPV daily of FUWANG FOOD LTD is decreasing except
the year 2015. The delay in paying DPO for goods reduces the present value of cash outflows.
In2015, the company managed to increase DPO somehow and it experienced the increase in NPV
daily. The length of time that funds are tied up in the operating cycle reduces the present value
of cash inflows. DIH and DSO are increasing from year to year by a meaningful amount. As a
result, NPV Daily also experiences downfall except the year 2015. We have also calculated NPV
Perpetuity from NPV daily in the excel worksheet. The NPV Perpetuity of FUWANG FOOD of 5
annual years is given below:

NPV 2013 2014 2015 2016 2017


perpetuity
1,533,135,9 1,495,337,545 1,982,972,716 1,560,677,615 1,156,843,079
91.02 .87 .60 .36 .51
20

Series 1
2,500,000,000.00

2,000,000,000.00

1,500,000,000.00

1,000,000,000.00

500,000,000.00

0.00
2013 2014 2015 2016 2017

The company is experiencing downfall in NPV Daily except the year in 2015. So definitely the
perpetual effect will have such a trend

Cash Discount Offered by FUWANG FOOD LTD:


After going through the entire financial reports of FUWANG`FOOD from the year 2013 to 2017,
we did not find any mentioned cash discount offered by the company. The company is providing
credit terms to their customers but does not offer any cash discount. The increasing DSO from
2013 to 2017 indicates the poor management and minimal effort of FUWANG FOOD’s credit and
collection department. So, we think they should offer a cash discount policy which will decrease
DSO and eventually enhance the overall liquidity of the company.

Our suggested Cash Discount Policy is given below:


Fu-Wang Food is wondering whether to offer its customers, a 2% cash discount if they pay within
10 days. At present it has net 30 terms credit policy. The financial manager is evaluating the
proposed new terms of 2/10, net 30 versus present net 30. Under the proposed terms, he
anticipates a 3-percent increase in sales volume and a 0.5% reduction in the bad debt loss rate,
from 3 percent to 2.5 percent. He estimates that the percent of sales made to cash discount
takers will be 40percent, with the remaining 60 percent continuing to pay in 35 days (the present
average collection period). There will be no interest charged for late payment. The customers
taking the discount will pay, on average, on the 10th day after the invoice date. Fu- Wang Food
marketing activity has forecasted sales for the upcoming year to be 761,109,392 with 3% growth
rate. The cost accounting department estimates the VCR to be 0.60 and the credit/collection cost
21

to be 4 percent of sales and under the new credit terms, each of these cost variables will retain
the same relationship to sales. They presently have 10% cost of capital.
Cash Discount:
bn=2.5%=.025 be=3%=.03

dn=2%=.02 de=0

PN=40%=.40 Pe=0

CPn=35 Days CPe=35 Days

DPn= 10 Days DPe=0

• EXPn=4%=.04
EXPe=4%=.04
• VCRn=6%=.60 VCRe=6%=.06
• i=10%=.10/365= .000273973 i= 10%=.10/365=.000273973
• Sn= 761,109,392/365=2085,231.211 Se=761,109,392/365=2085,231.211
• g= 3%=.03 Ze=669,707.2286
• Zn=689,395.6375

∆𝒛 =19,688.4089

∆𝑵𝑷𝑽= 71,862,588.28

Because of this positive NPV, we recommend that the company should offer a cash discount of
2% if the customers pay within 10 days. So, they should offer this cash discount to their customer,
because it will help the company to collect their receivables more efficiently. Therefore, the
company will be able to overcome debt by minimizing it and it will decrease the default risk and
credit risk. The company will be able to see higher liquidity which will increase the overall
financial capability of the company. It will increase the value of FUWANG FOOD in the market.

Cash Discount Calculation:


[(1 + 𝑔)𝑆𝑒](1 ‒ 𝑑𝑁)𝑃𝑛(1 ‒ 𝑏𝑁) [(1 + 𝑔)𝑆𝑒](1 ‒ 𝑃𝑛)(1 ‒ 𝑏𝑁) 𝐸𝑋𝑃𝑛[(1 + 𝑔)𝑆𝑒]
Zn= (1 + 𝑖𝐷𝑃𝑛)
+ (1 + 𝑖𝐶𝑃𝑛)
- VCR [(1+g) Se] - (1 + 𝑖𝐶𝑃𝑛)
22

[(1 + .03)2085,231.211](1 ‒ .02)(.40)(1 ‒ .025) [(1.03)2085,231.211](1 ‒ .40)(1 ‒ .025)


= + - .60[(1+.03) 2,085,231.211-
1+ ( )10
.10
365
.10
1 + 365 35
.04(1.03)2,085,231.211
.10
1 + 365 10

= 818,641.7757 + 1,244,522.291 – 1,288,672.888 – 85,095.54126

= 689,395.6375
2,085,231.211(1 ‒ 0)(1 ‒ .03) .04 ∗ 2,085,231.211
Zn= .10 - 60 [2,085,231.211] ‒
1 + 365 35 1+ ( 365
.10
)35
=689,395.6375

Conclusion: Throughout the investigation, the study suggests that FU-WANG FOOD LTD has
experienced up and down in their business. Be that as it may, things have turned out to be better
step by step. The state of FUWANGFOOD might better in an alternate viewpoint. FU-WANG FOOD
LTD ought to be more concern about productively use their working capital administration. The
stud has done 5 years of proportions examination those are fallen under dissolvability and
liquidity measures for FU-WANG FOOD LTD, deciphered and dissected those proportions and we
have likewise seen it short –term financing procedures is utilizing moderate-financing
methodologies that are fundamentally a blend of both forceful and preservationist financing
systems. FU-WANG FOOD LTD must improve their working capital administration to overcome
all those problems which are already mentioned, as well as to maximize their profitability in the
long run.
23

Reference:
 http://lankabd.com/dse/stock-market/FUWANGFOOD%60S/fu-wang-foods-
limited/listPortalPaginationAnnouncement.html?isLimited=true&sto
 https://www.bdo.co.za/en-za/insights/2017/audit/measuring-solvency-and-liquidity-
to-assess-business-strength
 https://www.investopedia.com/terms/c/currentratio.asp
 https://www.accountingformanagement.org/current-ratio/
24

APPENDIX