NORTH SOUTH UNIVERSITY

Course: FIN340
Course Title: Working Capital Management
Sec: 01

“Working Capital Analysis”

(Individual Project)

Submitted By:
Ishtiaque Hasan Tonmoy
Id: 1510635030

Submitted To:
Mr. Abdullah Al Mamun
Lecturer
Department of Accounting & Finance
10th September, 2018

Mr. Abdullah Al Mamun (AHM)

Lecturer
Department of Finance
North South University, Dhaka, Bangladesh

Subject: Letter of Transmittal

Dear Sir,

You will be glad to know that I have completed the Working Capital Analysis on the four
companies under the technologies industry that are listed in NASDAQ as follows; Apple Inc.,
Amazon, Microsoft and Facebook. I would like to thank you for your guidance and motivation in
every step of this project.

In every segment of this project, I tried to increase my knowledge about the importance of the
short-term financial analysis and learned how corporate financial analysists make short-term
financial decisions. I am confident that once you go through the entire report, you will get a
precise knowledge about my abilities, and understand how much I’ve worked hard to make this
project a success.

It will be very kind of you to examine my effort and give me feedbacks to enhance my skills for
future prospects.

Thank you.

Faithfully yours,

Ishtiaque Hasan Tonmoy-1510635030

 Table of Contents
Part 01: Primary Calculations......................................................................................................................1

Net Working Capital (NWC):..................................................................................................................1

Working Capital Requirements (WCR):..................................................................................................1

Part 02: Financial Ratio Analysis................................................................................................................2

Liquidity Measures:.................................................................................................................................2

Current Ratio:......................................................................................................................................2

Quick Ratio/Acid Test Ratio:..............................................................................................................4

Net Working Capital (NWC) to Total Asset:.......................................................................................5

Cash Conversion Period:.........................................................................................................................6

DIH......................................................................................................................................................6

DSO.....................................................................................................................................................6

DSO.....................................................................................................................................................6

CCP.....................................................................................................................................................6

Flexibility Measures:...............................................................................................................................7

Inventory Turnover:.............................................................................................................................7

A/C Receivable Turnover:...................................................................................................................9

Average Collection Period:................................................................................................................10

Part 03: Comparative Analysis..................................................................................................................11

Primary Calculations:............................................................................................................................11

Liquidity Measures:...............................................................................................................................11

Cash Conversion Period (CCP):............................................................................................................12

Flexibility Measures:.............................................................................................................................12

Conclusion:............................................................................................................................................12

Appendix...................................................................................................................................................13
Fin340 | Working Capital Analysis

Part 01: Primary Calculations

Net Working Capital (NWC):
Net Working Capital (NWC) is the difference between Current Asset and Current Liabilities.
Positive NWC indicates that the long-term funds finance Current Assets. On the Contrary,
Negative NWC indicates that the firm finances long-term assets with Current Liabilities.

Formula: Net Working Capital (NWC) = Current Asset - Current Liabilities

NWC of the year 2016 for the four selected companies are calculated as follows:

NWC of Apple Inc. (in million) = $106,869 – $79,006 = $27,863

NWC of Amazon (in million) = $45,781 – $43,816 = $1,965

NWC of Microsoft (in million) = $139,660 – $59,357 = $80,303

NWC of Facebook (in million) = $34,401 – $2,875 = $31,526

Cross – Sectional Interpretation:

The calculations above show the NWC of the selected four companies. For the year 2016; the
NWC of Apple Inc. was $27,863 million and Amazon was $1,965 million (Lowest). On the
contrary, Microsoft had the highest amount of $80,303 million in NWC and Facebook had the
second highest amount of $31,526 million in NWC at the same year.

Working Capital Requirements (WCR):

Working Capital Requirements (WCR) is the difference between Current Operating Assets and
Current Operating Liabilities. These accounts indicate spontaneous uses and sources of funds
generated over the working capital cycle. One significant feature of WCR is that it omits the
accounts of NWC that are not directly related to the operating components of working capital
cycle.

Formula: Working Capital Requirements (WCR) = Current Operating Asset - Current Operating Liabilities

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Fin340 | Working Capital Analysis

WCR of the year 2016 for the four selected companies are calculated as follows:

WCR of Apple Inc. (in million) = $86,385 – $75,506 = $10,879

WCR of Amazon (in million) = $26,447 – $43,816 = $-17,369

WCR of Microsoft (in million) = $133,150 – $59,357 = $73,793

WCR of Facebook (in million) = $25,498 – $2,595 = $22,903

The calculations above show the WCR of the selected four companies. For the year 2016; the
WCR of Apple Inc., Microsoft and Facebook was $10,879 million, $73,369 million and $22,903
million respectively. The positive value of WCR indicates that the companies working capital
cycle requires additional financing.

On the contrary, Amazon had a negative WCR amount of -$17,369 million which indicates that
the working capital cycle provides additional financing for long term assets, positively impacting
solvency.

Part 02: Financial Ratio Analysis

Liquidity Measures:
Liquidity Ratio is a class of financial metrics that is used to determine a company's ability to pay
off its short-terms debts and obligations. In general, the higher the value of the ratio is, the larger
the margin of safety that the company possesses to cover short-term debts would be.

Current Ratio:
The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-
term obligations.

Formula: Current Ratio= Current Asset/Current Liabilities

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Fin340 | Working Capital Analysis

Calculation:

$ 106869
Current Ratio of Apple Inc. (in million) = = 1.353
$ 79006

$ 45781
Current Ratio of Amazon (in million) = = 1.045
$ 43816

$ 139660
Current Ratio of Microsoft (in million) = = 2.353
$ 59357

$ 34401
Current Ratio of Facebook (in million) = = 11.966
$ 2875

Current Ratio
14
11.966
12

10

4
2.353
2 1.353 1.045

Apple Inc. Amazon Microsoft Facebook

Cross Sectional Interpretation:

The graph above shows the current ratio of the selected four companies. For the year 2016, the
current ratio of Apple Inc., Amazon and Microsoft was 1.353, 1.045 and 2.353 respectively.
These three companies exhibit a lower level of coverage provided to short term creditors with
respect to the level of current assets.

On the contrary, Facebook had a current ratio of 11.966(highest) at the same year exhibiting a
higher level of coverage provided to short term creditors.

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Fin340 | Working Capital Analysis

Quick Ratio/Acid Test Ratio:

Quick ratio is a stringent indicator that determines whether a firm has enough short-term assets
to cover its immediate liabilities without selling inventory. It helps to find out a company's
ability to settle its current liabilities on a very short notice.

Formula: Quick ratio = (Current Asset- Inventory)/ Current Liabilities

Calculation:

$ 106869−$ 2132
Quick Ratio of Apple Inc. (in million) = = 1.326
$ 79006

$ 45781−$ 11461
Quick Ratio of Amazon (in million) = = 0.783
$ 43816

$ 139660−$ 2251
Quick Ratio of Microsoft (in million) = = 2.315
$ 59357

$ 34401−$ 0
Quick Ratio of Facebook (in million) = = 11.966
$ 2875

Cross – Sectional Interpretation:

The graph aside shows the quick ratio, also Quick Ratio
known as the acid test ratio of the selected four
11.966

companies.
2.315

For the year 2016, the quick ratio of Apple 0.783

Inc., Amazon and Microsoft was 1.326, 0.783

1.326
and 2.315 respectively. These smaller values 0 2 4 6 8 10 12 14

exhibit the company’s less ability to meet its

Apple Inc. Amazon Microsoft Facebook
short-term obligations with its most liquid
assets. On the contrary, Facebook had a current ratio of 11.966(highest) which was equal to its
current ratio of the same year, indicating a higher capacity to meet its short-term obligations.

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Fin340 | Working Capital Analysis

However, the reason behind Facebook’s equal current and quick ratio is its type of business.
Because of being an online based social media platform Facebook doesn’t or can’t hold any
tangible inventory.

Net Working Capital (NWC) to Total Asset:

NWC to asset indicate how much firm invests in net working capital out of total Investing in
Asset. It is used to measure the short-term liquidity of a business and can also be used to obtain a
general impression of the ability of company management to utilize assets in an efficient manner.

Formula: Net Working Capital to Total Asset = Net Working Capital / Total Asset

Calculation:

$ 106869−$ 79006
NWC to Total Asset of Apple Inc. (in million) = = 0.087
$ 321686

$ 45781−$ 43816
NWC to Total Asset of Amazon (in million) = = 0.024
$ 83402

$ 139660−$ 59357
NWC to Total Asset of Microsoft (in million) = = 0.415
$ 193694

$ 34401−2875
NWC to Total Asset of Facebook (in million) = = 0.485
$ 64961

Cross Sectional Interpretation:

The graph aside shows the NWC to Total Asset

NWC to Total Asset
Ratio of the selected four companies. 0.6
0.485
0.5
0.415
For the year 2016, the NWC to Total Asset 0.4
0.3
Ratio of Apple Inc. and Amazon was 0.087 and
0.2
0.024 respectively, which was comparatively 0.087
0.1
0.024
lower than the other two corporations. On the 0

contrary, Microsoft had an NWC to Total Apple Inc. Amazon Microsoft Facebook

Asset Ratio of 0.415 exhibiting a second

highest score; which was slightly higher in comparison to the previously calculated ratios for

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Fin340 | Working Capital Analysis

each corporation. And Facebook had the highest score of 0.485 in this category of liquidity ratio.

Cash Conversion Period:

Cash Conversion period represents the time needed to convert $1 of disbursements into $1 of
cash receipts. However, the calculation of Cash Conversion period includes the calculation of
Days Inventory Held (DIH), Days Sales Outstanding (DSO) and Days payable Outstanding
(DPO).

The following formulae has been used to calculate each component of CCP:

Inventory
DIH = COGS
365
Accounts Receivables
DSO = Sales
365
Accounts Payables
DSO = COGS
365
CCP = (DIH + DSO) – DPO

The following table provides the calculation for each item in order to find out the Cash
Conversion Period:
CCP Item Apple Inc. Amazon Microsoft Facebook

DIH 55.92 days 65.45 days 78.06 days 53.67 days

DSO 29.67 days 59.57 days 68.5 days 47.54 days

OC 85.59 days 125.02 days 146.56 days 101.21 days

DPO 25.64 days 55.89 days 57.84 days 33.56 days

CCP 59.95 days 69.13 days 88.72 days 67.65 days

However, the graphical interpretation of Cash Conversion Period has been covered in the
following page:

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Fin340 | Working Capital Analysis

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Fin340 | Working Capital Analysis

Cash Conversion Period

67.65

88.72

69.13

59.95

0 10 20 30 40 50 60 70 80 90 100

Apple Inc. Amazon Microsoft Facebook

Cross – Sectional Interpretation:

From the graph above, we can see the cash conversion period of the four selected companies.
The smaller values of CCP of Apple Inc. and Facebook exhibit a higher efficiency and enhanced
cashflow of the two companies.

On the contrary, higher values of Amazon and Microsoft exhibit a lower efficiency and reduced
cashflow.

Flexibility Measures:
Flexibility helps to measures the firm’s efficiency of utilizing its assets. For example, these ratios
can provide insight into the success of the firm's credit policy and inventory management. These
ratios are also known as Asset Management Ratios.

Inventory Turnover:
Inventory turnover is an efficiency ratio that shows how many times or how frequently firm’s
inventory is converted into sales. The higher the inventory turnover ratio is, the more efficient
and profitable the firm is.

Formula: Inventory Turnover = Cost of Goods Sold / Inventory

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Fin340 | Working Capital Analysis

Calculation:

$ 131,376
Inventory Turnover of Apple Inc. (in million) = = 61.62
$ 2,132

$ 88,810
Inventory Turnover of Amazon (in million) = = 7.75
$ 11,461

$ 139,660
Inventory Turnover of Microsoft (in million) = = 2.35
$ 59,357

$ 17,745
Inventory Turnover of Facebook (in million) = = 4.68
$ 3,789

Inventory Turnover
0.14
0.12
0.1
0.08
0.06 0.1291

0.04
0.0687
0.02
0.0162
0 0
Apple Inc. Amazon Microsoft Facebook

Cross – Sectional Interpretation:

From the graph above, we can see the Inventory Turnover of the four selected companies. The
smaller values of Inventory Turnover ratio of Apple Inc. and Microsoft exhibit a lower frequency
with which their firm’s inventory is converted into sales. The value of a Zero in Inventory
Turnover ratio of Facebook exhibits its type of business. As of being a service-based company, it
had no inventories in hand.

On the contrary, the highest value in the same category of ratio of Amazon exhibit a higher
frequency in firm’s inventory is converted into sales.

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Fin340 | Working Capital Analysis

A/C Receivable Turnover:

It measures that how many times receivable can be converted into sales. However, it is measured
as follows:
Formula: Receivable Turnover = Sales / Accounts Receivable
Calculation:

$ 215,639
A/C Receivable Turnover of Apple Inc. (in million) = = 13.68 times
$ 15,754

$ 27,638
A/C Receivable Turnover of Amazon (in million) = = 6.9216 times
$ 3,993

$ 61,502
A/C Receivable Turnover of Microsoft (in million) = = 3.37times
$ 18,277

$ 135,987
A/C Receivable Turnover of Facebook (in million) = = 16.31 times
$ 8,339

A/C Receivables Turnover

16.31

3.37

6.92

13.68

0 2 4 6 8 10 12 14 16 18

Apple Inc. Amazon Microsoft Facebook

Cross – Sectional Interpretation:

From the graph above, we can see that the A/C receivables Turnover of the four selected
companies. The higher ratio of Apple Inc. and Facebook exhibit that both the company’s
collection of accounts receivable is efficient, and that the company has a high proportion of
quality customers that pay off their debts quickly. On the contrary, the lower value of Amazon
and Microsoft exhibit a comparatively poorer efficiency in the collection of accounts receivable.

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Fin340 | Working Capital Analysis

Average Collection Period:

Also known as Days’ Sales in Receivable, measures the firm’s ability to collect cash from its
credit customer after a sale has been made. Also, it is to be mentioned; it is measured in terms of
the number of days.

Day’s sales in receivable = 365 Days / Receivables Turnover

Calculation:

365
Average Collection Period of Apple Inc. = = 26.68 days
13.68

365
Average Collection Period of Amazon = = 52.73 days
6.9216

365
Average Collection Period of Microsoft = = 3.37 days
3.37

365
Average Collection Period of Facebook = = 16.31 days
16.31

Cross – Sectional Interpretation:

The graph aside above, we can see the
120
Average Collcetion Period
Average Collection Period of the four selected
100
companies. The higher value of Amazon and
80
Apple Inc. exhibit these firm’s poor 60
108.31
performance in collecting cash from its credit 40
52.73
20
customer after a sale has been made. 26.68 22.38
0

On the contrary, lower score of Facebook and

Apple Inc. Amazon Microsoft Facebook
Microsoft exhibit their higher efficiency in
collecting money after a credit sale.

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Fin340 | Working Capital Analysis

Part 03: Comparative Analysis

In order to do a proper comparison of the Working Capital of the four selected companies under
the Technology Industry that are enlisted in NASDAQ, we’ll have to compare each and every
measure of working capital that have been covered in this report.

Primary Calculations:
Beginning with the Primary Calculations, the Net Working Capital of Apple Inc. was $27,863
million and Amazon was $1,965 million (Lowest). On the contrary, Microsoft had the highest
amount of $80,303 million in NWC and Facebook had the second highest amount of $31,526
million in NWC at the same year. Therefore, the highest value of Microsoft in this category
exhibit a higher amount funds that are used for financing current assets, whereas, the other three
companies were performing poorly.

The calculations of WCR for the selected four companies the were $10,879 million (Apple Inc.),
$73,369 million (Microsoft) and $22,903 million (Facebook) respectively. These positive values
of WCR indicate that these company’s working capital cycle requires additional financing. On
the contrary, Amazon had a negative WCR amount of -$17,369 million which indicates that the
working capital cycle provides additional financing for its long-term assets, positively impacting
solvency.

Liquidity Measures:
For the year 2016, the current ratio of Apple Inc., Amazon and Microsoft was 1.353, 1.045 and
2.353 respectively. These three companies exhibit a lower level of coverage provided to short
term creditors with respect to the level of current assets. Whereas, on the hand, Facebook had a
current ratio of 11.966(highest) at the same year exhibiting a higher level of coverage provided
to short term creditors.

During the same year, the quick ratio of Apple Inc., Amazon and Microsoft was 1.326, 0.783 and
2.315 respectively. These smaller values exhibit the company’s less ability to meet its short-term
obligations with its most liquid assets. On the contrary, Facebook had a current ratio of
11.966(highest) which was equal to its current ratio of the same year, indicating a higher
capacity to meet its short-term obligations. However, the reason behind Facebook’s equal current

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Fin340 | Working Capital Analysis

and quick ratio is its type of business.

Cash Conversion Period (CCP):

The Cash Conversion period of the four companies for the year 2016, have been calculated by
finding out their Days Inventory Held (DIH), Days Sales Outstanding (DSO) and Days Payable
Outstanding (DPO). The smaller values of CCP of Apple Inc. and Facebook exhibit a higher
efficiency and enhanced cashflow of the two companies. On the contrary, higher values of
Amazon and Microsoft exhibit a lower efficiency and reduced cashflow.

Flexibility Measures:
For the year 2016, The smaller values of Inventory Turnover ratio of Apple Inc. and Microsoft
exhibit a lower frequency with which their firm’s inventory is converted into sales. The value of
a Zero in Inventory Turnover ratio of Facebook exhibits its type of business. As of being a
service-based company, it had no inventories in hand. On the contrary, the highest value in the
same category, the higher score of Amazon exhibit a higher frequency with which their firm’s
inventory is converted into sales.

During the same year, the higher score in A/C Receivables Turnover of Apple Inc. and Facebook
exhibit their efficiency in collecting receivables and indicates that the company has a high
proportion of quality customers that pay off their debts quickly. On the contrary, the lower value
of Amazon and Microsoft exhibit a comparatively poorer efficiency in the collection of accounts
receivable.

However, the Average Collection Period of the four selected companies were also calculated.
The higher score in Average Collection Period of Amazon and Apple Inc. exhibit these firm’s
poor performance in collecting cash from its credit customer after a sale has been made. On the
contrary, lower score of Facebook and Microsoft exhibit their higher efficiency in collecting
money after a credit sale.

Conclusion:
After a thorough scrutiny, we can say that the different measures of working capital analysis
resulted in variations among the four selected tech corporations enlisted in NASDAQ. However,
Facebook among the four companies seemed to perform well in terms of maintaining short-term

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Fin340 | Working Capital Analysis

financing and other obligations related to the working capital. Also, it is to be mentioned that the
working capital management of Microsoft was quite satisfactory during the year 2016.

Appendix
(Financial Statements of the four selected Companies)

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