Calculating Current Assets

Calculating Current Assets

CURRENT ASSETS

(i) Ascertain the rate of stock turnover, using the figure of sales if given in the chairman's statement. An increasing rate of stock turnover from year to year should point to efficiency and the prospect of increasing profits; hence a sound investment.

(ii) A significant fall may mean falling orders. Observe from the annual report the state of the order website . A full order website will lead to stable or increasing 'work-in-progress'. This reasoning may not be true of the building and other large contracting industries as their work-in-progress can have considerable fluctuations from year to year.

(iii)DEBToRS. Normal expansion of business means an inevitable increase in debtors. So long as the increase is in proportion to the increase in the figure for sales (or, if this figure is not available, to the increase in trading profits) the position is satisfactory, it; however, the debtors figure rises considerably (again apart from the building and large contracting industries) this could signify that (a) the company is finding difficulty in collecting its accounts due for goods supplied, or (b) it is giving easier credit terms to attract business. Neither case is a healthy sign for investors.

(iv)SHORT-TERM Observe the market value and compare it with the website value. Any appreciation here represents further reserves, which though disclosed in the quoted market value, are not shown in the reserves figure.

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