STRATEGIC FINANCE ISSUES
COURSE CODE: MBA 556
MAIN ASSIGNMENT
BY
YOUR NAME
STUDENT NUMBER:
1
QUESTION ONE
Ghana Oil Company Limited known as Oil Marketing Companies listed on the Ghana stock
exchange working’s capital management for the 2015–2019 financial years.
i.
Calculation of Relevant Ratios
Formula
Ghana Oil Company Limited
2016 GH¢’000
Working Capital
Management
Ratios
2015 GH¢’000
Trade receivables
collection period
Trade Receivables/credit
sales *365 days
313,983/ 2,028,369*365
days
= 57 days
267,302/ 1,954,505*365
days
=50 days
Trade payables
period
Trade payables/credit
purchases 365 days
Inventory holding
period
Inventory/Cost of sales
*365 days
Inventory
Turnover
cost of sales / Inventory
420,451/1,882,756*365
days
=82 days
29,594/1,882,756*365
days
= 6 days
1,882,756/29,594
= 63 times
322,304/ 1,844,195*365
days
=63days
24,584/1,844,195*365
days
=5 days
1,844,195/24,584
=75 times
2018 GH¢’000
Working Capital
Management
Ratios
2017 GH¢’000
Trade receivables
collection period
Trade Receivables/credit
sales *365 days
475,426/3,080,508*365
days
=56 days
396,780/2,467,872*365
days
=59 days
Trade payables
period
Trade payables/credit
purchases 365 days
Inventory holding
period
Inventory/Cost of sales
*365 days
Inventory
Turnover
cost of sales / Inventory
615,499/2,850,976*365
days
=78 days
32,731/2,850,976*365
days
= 4 days
2,850,976/ 32,731
=87 times
528,485/2,311,965*365
days
= 83 days
42,153/2,311,965*365
days
= 67 days
2,311,965/42,153
=54 times
2
2019 GH¢’000
Working Capital
Management
Ratios
Trade receivables
collection period
Trade Receivables/credit
sales *365 days
571,828/3,570,967* 365 = 58days
Trade payables
period
Trade payables/credit
purchases *365 days
692,462/3,274,205*365= 77days
Inventory holding
period
Inventory/Cost of sales
*365 days
36,707/3,274,205*365 = 4 days
Inventory
Turnover
cost of sales / Inventory
3,274,205/36,707= 89 times
ii.
RESULTS DISCUSSING TRENDS
Introduction
Ghana Oil Company Limited’s five most recent income statements and balance sheets, spanning
the years 2015 to 2019, were used to produce these working capital management ratios. The
computations in the appendix are used in the ratio analysis that displays the trends.
Working Capital Management Ratios:
Trade receivables collection period
The average collection period for accounts receivable is the time it takes for a company to
recover payments owed by its customers. Businesses utilize the average collection period to
ensure that they have enough cash on hand to meet their financial obligations. In general, it is
desirable to have a shorter average collecting duration than a greater average collecting duration.
Money is collected more quickly by an organization having a short average collection period
(Kenton, 2021). Since 2015, Ghana Oil Company Limited has had a poor performance, with
periods of 50 days, 57 days, 59 days, 56 days, and now 58 days in 2019. Although this is based
3
on Ghana Oil Company Limited’s historical default rates, the increasing trade receivables
collection period indicates a lack of credit control. By replacing IAS 39's incurred loss technique
with a forward-looking ECL methodology, IFRS 9 has significantly modified the Group's trade
receivable loss impairment method. The Group has been documenting the allowance for
expected credit losses for all trade receivables since January 1, 2018. The ECL allowance is
calculated based on the estimated credit losses during the asset's lifetime. The ECL allowance is
calculated using the lifetime anticipated credit loss (LTECL), unless there has been no significant
increase in credit risk since origination, in which case it is calculated using the 12-month
expected credit loss (12 months ECL). As a result of this, Ghana Oil Company Limited should
increase its cash reserves and maintain constant creditworthiness, fostering excellent
deleveraging.
Trade payables period
When the turnover ratio rises, the company pays its suppliers faster than it did previously. A
rising ratio implies that the company has adequate cash on hand to make timely payments on its
short-term debt. As a result, a rising accounts payable turnover ratio could indicate that the
company is managing its debts and cash flow properly (Murphy, 2021). According to the
creditors' collection time, Ghana Oil Company Limited took 63 days, 82 days, 78 days, 83 days,
and 77days to pay its creditors over a five-year period. The creditor of Ghana Oil Company
Limited has an unusually long collection time. Creditworthiness may worsen as a result, and
credit facilities may be restricted or cancelled. According to Ghana Oil Company Limited's 2019
Annual Report, there is a risk that the Group would either lack the financial resources to meet all
of its obligations and commitments when they are due, or will only be able to access those
resources if and when they become due. Ghana Oil Company Limited may be able to take
advantage of its creditworthiness by reducing the time it takes creditors to recover payments.
Inventory holding period
This indicator assesses a company's ability to promptly sell off its inventory. The entity will
benefit from a longer duration. Over a five-year period, Ghana Oil Company Limited performed
poorly, with inventory holding times of 5 days, 6 days, 4 days, 67 days, and 4 days. This is
because inventories have been recognized as an exempt item. This is due to the fact that the
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Company declared GH32, 731 in inventory as an expense in 2018. These costs are already
factored into the buying price. As a result of the write-down to net realizable value, inventory has
been reduced by GH3, 976. In 2019, the write-down was reported as a cost.
Inventory Turnover
This indicator assesses a company's ability to promptly sell off its inventory. The entity will
benefit from a shorter duration. A longer inventory turnover period could suggest a lack of
demand for the company's products or poor inventory management. Over the last five years, the
ratios of Ghana Oil Company Limited have been 75 times, 63 times, 54 times, 87 times, and 89
times. This indicator assesses a company's ability to promptly sell off its inventory. The entity
will benefit from a longer duration.
Conclusion
Despite the fact that the company's statistics show a slight improvement in recent years, Ghana
Oil Company Limited's working capital management is poor due to longer trade receivables
collection periods, shorter trade payables periods, shorter Inventory holding periods, and higher
Inventory Turnover. Total Petroleum Ghana Limited's five-year financial reports have raised a
slew of problems.
iii.
Discounted Cash Flows
According to a study by (CFI, 2021), The discounted cash flow (DCF) formula is equal to the
total of the cash flows in each period divided by one plus the discount rate (WACC) raised to the
power of the period number. Using a discount rate, a DCF analysis determines the present value
of predicted future cash flows. The concept of present value of money can be used by investors
to analyze whether future cash flows from an intangible asset are worth investing in. The notion
of present value of money can be used by investors to analyze if future cash flows from a project
or investment are equal to or greater than the initial investment. If the DCF value is greater than
the current investment cost, the opportunity should be pursued.
5
Given the current Bank of Ghana 364 day bill T-bill rate and a discount rate of 14.15 percent, the
discounted cash flows of the expected values of Total Company Limited's provided statement of
cash flows over a five-year period are shown below
2016 GH¢’000
2015 GH¢’000
2019 GH¢’000
2018 GH¢’000
2017 GH¢’000
Cash and cash
equivalents at
31 December
Discount Rate
(14.15%)
(16,008)
6,418
(17,682)
55007
(37357)
0.8760
0.7674
0.6723
0.5890
0.5160
Net Present
Value
(14023.008)
(4925.1732)
(11887.6086)
32399.123
(19276.212)
Total Net Present Value = GH¢’000 (17712.8788)
Comments:
Due to negative cashflows, Ghana Oil Company Limited has a negative net present value of
GH'000 (17712.8788) over the next five years, which should be ignored. As a result, investors
will be unable to put their money into the market.
6
QUESTION TWO
7
WORKINGS;
8
References
Murphy, C. (2021). Accounts Payable Turnover Ratio Definition. Corporate Finance &
Accounting.https://www.investopedia.com/terms/a/accountspayableturnoverratio.asp
CFI, J. (2021). Discounted Cash Flow (DCF). How to calculate Net Present Value.
https://corporatefinanceinstitute.com/resources/knowledge/valuation/dcf-formula-guide/
Ghana
Oil
Company
Limited.
https://africanfinancials.com/document/gh-goil-
2015/2016/2017/2018/2019-ar-00/
9