Working Capital Analysis: Ras Al Khaima Ceramics PLC
Defining Working Capital
Working Capital is that source of capital that is used in funding day-to-day operations of the company. This financial metric is a measure of financial health and short-term efficiency of an entity.
About the paper
The paper is commissioned to analyze the working capital position of Ras Al Khaima Ceramics PLC for the year 2014 and 2015. As part of the analysis, we will be providing comprehensive analysis for the components of the working capital position during both the years. The paper will finally be culminated with a recommendation on how the company can improve their working capital position taking the change in working capital during 2015, as our benchmark.
Working Capital(Short-term):
Formula: Current Assets- Current Liabilities
2014: 3410832-2107055= AED 1303777
2015: 3251184-1648009= AED 1603175
Working Capital(Long-term):
Formula: Non-Current Assets- (Total Equity+ Non-Currrent Liabilities)
2014: 2589073-(3034813+858007)= -AED 1303747
2015: 2730591-(2937452+1396314)= -AED1603175
Detailed Components
2014:
Referring to the above calculation, we can see that the company has a positive working capital position with current assets significantly higher than the current liabilities. Important to note, the current asset position of the company is largely composed of inventory and trade receivable, which accounts for 33.41% and 33.65% of the total current asset. This was followed by cash position that accounted for 13.14% of the total current assets.
On the other hand, the current liabilities of the company are significantly composed of short-term borrowings and trade payables, which accounted for 38.03% and 38.63%, respectively, of the total current liabilities. This was followed by short-term borrowings from Islamic banks that accounted for 14.13% of the total current liabilities.
2015:
Referring to the above calculation, we can see that during 2015, the working capital position of the company was recorded at AED 1603175. During the year, the current assets of the company continued to be represented by inventories and trade receivables, which accounts for 35.10% and 37.14%, respectively. This was followed by the amount due from related parties that accounted for 16.11% of the total current assets, while cash represented 11.18%.
Our calculation revealed that over the year, the working capital amount has increased from AED 1303777 to AED 1603175, recording a growth of 22.96%. However, the growth here is not sustainable as the same has been achieved with a higher proportion reduction in current liabilities by -21.79%, while the current asset also plummeted by -4.68%. Important to note during 2015, the cash position of the company decreased by -18.93%, while the amount due from related parties and trade receivables was up by 66.30% and 5.18%, respectively.
On the other hand, it was considerable to note that while the cash position was down and receivables were on a higher end, the company retired a significant amount of short-term borrowings and billings, which decreased by -59.67% and -15.18%, respectively.
This confirms a rather poor working capital strategy followed by the company as while its receivable collection policy is turning futile, it is using other long-term borrowings to pay its current liabilities. Most importantly, declining cash position and increasing receivables should send a direct signal to the management to reconsider its receivable collection policy or should start selling the products primarily on cash basis or limited period credit. If no action is taken, the company may soon witness a dried up liquidity position.
Recommendations
As discussed in the previous section, Ras Al Khaima Ceramics PLC is following a poor working capital management policy, and should thus consider to improve the same. We have highlighted some constructive suggestions to improve the working capital position, hereunder:
i)Focusing sales on cash basis
As noted, during 2015, the amount due from related parties surged by 66.38%, while the cash position was down by -18.93%. The trend indicates that the company is selling its goods primarily on credit basis, but is unable to collect the receivables. Moreover, such a large percentage decline in the cash position of the company is a worrisome issue.
Therefore, in order to improve the working capital position, the company should focus on selling goods on cash basis.
ii) Speeding up the collection process
Next, with a significant amount tied up with the trade receivables and related parties, the company is losing interest and is affecting cash liquidity too. Therefore, the company should speed up the collection process by offering discounts to the debtors. Moreover, for new sales, the company should also sell goods on a short credit period.
Conclusion
At the end, we can conclude that even though the working capital amount of Ras Al Khaima Ceramics PLC increased during 2015, however, the same was not in a sustainable way. An indpeth analysis revealed that current liabilities were being paid using borrowings as the company was short on cash with trade receivables and related parties holding a significant amount of capital.
Therefore, it is suggested that the management should consider the offered recommendations with utmost urgency, else it may soon witness the liquidity crisis.
