Essential Financial Metrics and Asset Management Concepts
Positive Working Capital (Fons de Maniobra)
Positive working capital is the difference between current assets and current liabilities. It can also be defined as the portion of current assets funded by permanent capital. Positive working capital implies that current assets are financed with long-term resources, providing financial stability and greater liquidity for current assets relative to current liabilities. The overall liquidity depends on the level of current assets (without significant loss of value) and the level of current liabilities. Positive working capital is not an absolute indicator but is related to the evolution of business activity (Current Assets – Current Liabilities).
Liquidity Risk and Unpaid Debts
Liquidity risk and unpaid debts refer to the possibility that expected charges are not met by debtors at maturity, or that debts become uncollectible. This can lead to treasury imbalances and uncollectible accounts, impacting the income statement. An important aspect is the preventive management of risk and the assessment of credit granted to customers. Other instruments, such as factoring, help solve credit and liquidity problems. This involves understanding discounting and factoring.
Credit Rating and Financial Obligations
Credit rating qualifies the credit risk of issuers regarding their financial obligations. Rating agencies are information intermediaries; they help investors make decisions but do not act as their advisors. The qualification should not be construed as an endorsement or a recommendation to buy. It is a simple prediction about the likelihood of an issuer defaulting or breaking their commitments. Having a ‘Triple-A’ rating means that the debt issues of a country or entity have a minimum risk, even in an adverse environment. A ‘Double-A’ rating indicates slightly higher sensitivity to adverse conditions.
Key Financial Ratios and Cycle Times
Average Stock Period for Raw Materials (MP)
Calculates the average number of days raw materials remain in stock.
(Average Annual Stock of Raw Materials × 365) / Purchases
Example: ((4575 + 5450) / 2) × 365 / 67,125
Average Stock Period for Work-in-Progress (PC)
Measures the average number of days products remain in the production process.
(Average Annual Stock of Work-in-Progress × 365) / Annual Manufacturing Cost
Average Stock Period for Finished Goods (PA)
Indicates the average number of days finished products remain in stock before being sold.
(Average Annual Stock of Finished Goods × 365) / Cost of Goods Sold
Average Collection Period (Customers)
Represents the average number of days it takes for a company to collect payments from its customers.
(Average Client Balance × 365) / Sales
Example: (6500 / 1.16) × 365 / 150000
Average Payment Period (Suppliers)
Shows the average number of days a company takes to pay its suppliers.
(Average Supplier Balance × 365) / Purchases
Operating Cycle (Maturation Cycle)
Represents the average number of days from the time an investment is made in raw materials until the cash is collected from customers.
Raw Materials Stock Period + Work-in-Progress Stock Period + Finished Goods Stock Period + Average Collection Period
Cash Conversion Cycle (Financial Cycle)
Measures the number of days between paying for investments (e.g., raw materials) and collecting cash from customers.
Raw Materials Stock Period + Work-in-Progress Stock Period + Finished Goods Stock Period + Average Collection Period - Average Payment Period
Types of Asset Obsolescence
Physical Obsolescence
(e.g., 10 years) This refers to the commercial life of an asset, determined by technical assessments, accounting depreciation periods, and practical experience.
Economic Obsolescence
(e.g., 5 years) This is the commercial life of an asset, defined by the period until the appearance of products made with other fixed assets that can replace existing production methods.
Technological Obsolescence
(e.g., 7 years) This refers to the technological life of a product. Its determination is often difficult and problematic, requiring assessment of the results of R&D programs for new technologies.
A specific asset frame is 5 years younger.