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Goodwill factor Liquidity

Factor “Liquidity” is 1 out of 8 factors that GMC simulator uses to calculate the company's goodwill value. Below are presented parameters from decision and management report that are most correlated with goodwill factor “Liquidity” when calculating the company's goodwill value.

Parameters include direct and inverse correlation:

  1. Liquidity of company: 1.00

  2. Net cash flow: 0.70

  3. Less closing inventory values: -0,69

  4. Trading payments: -0,69

  5. Bank overdraft: -0.67

 

Liquidity of company in this case is calculated as:

(Cash + Cash equivalents - Bank overdraft - Term loans) / Net assets

As can be seen from the list of parameters, liquidity of company has the greatest direct correlation (1.00), i.e. the more cash (including deposits), the greater the goodwill factor “liquidity”. Other parameters are likely to affect only indirectly, since they are somehow related to liquidity of company parameter, namely:

  1. Positive net cash flow increases the company's liquidity and vice versa.

  2. Less closing inventory values freeze cash in products and raw materials and reduce the company's liquidity.

  3. Operating fees reduce net cash flow.

  4. Bank overdraft from the point of view of GMC simulator is the same liquidity, but only negative.

 

Thus, for the purpose of analyzing goodwill factor “Liquidity”, we will consider only parameters liquidity and bank overdraft (including other borrowed funds).

On previous version of GMC simulator for many seasons, there was very popular strategy in last period to take loan. Company received additional liquidity, and goodwill with company's share price increased accordingly. Later, this bug was fixed, eliminating amount of borrowed funds from the calculation, for example: if loan is 200 and cash is 250, then from the point of view of calculating goodwill, liquid funds are 250 - 200 = 50, i.e. as if you did not decide to take loan.

Diagram below shows dependence of goodwill factor “Liquidity” on liquidity of company for scenarios 12C1, 12C3, 14C1 and 14C3 in 1 period. The upper limit of the company's liquidity, after which factor does not increase, is on average 15% (1.162). The lower limit is on average -55% (0.866).

 

Hints:

  1. Goodwill factor “Liquidity” can vary between 0.866 - 1.162.

  2. Value of goodwill factor “Liquidity” does not depend on value in previous period or on decisions of competitors in the group.

  3. Optimal strategy in last period, the company's liquidity should be at least 15% (1.162).

  4. Free cash over 15% of the company's liquidity can be spent on paying dividends and increasing other goodwill factors to maximize investment performance.