Santos Capital Budgeting and Financial Analysis
2a) Company Perspective
Working capital measures a company short-term financial health as well as a company's efficiency. To calculate a working capital ratio, the paper uses the following formula:
"Working Capital Ratio= Current Assets / Current Liabilities"
In other words, the working capital ratio measures a liquidity capability of a company that measures whether a company has enough working capital to settle its short-term liability. A working capital below one indicates a negative working capital revealing that a company will face challenges in settling its short-term liability. On the other a working capital of 1.2 and 2.0 reveals that a company has enough liquidity to settle its short liability. However, working capital above 2 shows that a company is not embarking on an investing policy.
The paper uses the following financial tools to measure the working capital efficiency of Santos Company:
Working Capital Ratio
Inventory Turnover Ratio
Santos Working Capital Efficiency ($Millions)
Working Capital Ratio
2014
2013
Total Current Assets
2065
2078
Total Current Liabilities
1946
Working Capital Ratio
2065/1946
2078/1726
Working Capital Ratio
1.06
1.20
The results of the Santos working capital efficiency reveals that the company has ability to settle its short-term liability in both 2013 and 2014 fiscal year. However, the results of the working capital ratio for 2013 fiscal year is more satisfactory than 2014 working capital ratio. The working capital ratio of 2013 fiscal year is 1.20, which is satisfactory compared to 2014 working capital ratio of 1.06 that is less satisfactory.
Inventory Turnover Ratio
Similarly, Santos inventory turnover ratio for the 2013 fiscal year is better than the inventory turnover ratio for the 2014 fiscal year.
Santos Working Capital Efficiency ($Millions)
Working Capital Ratio
2014
2013
Inventory Turnover Ratio
Sales
Cost of Sales
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