The liquidity position of a company can be evaluated using several ratios which evaluate short-term assets and liabilities and a firm’s ability to settle short-term debts (Gibson, 2011). These ratios can provide insight into a firm’s ability to repay its debts in the short term (Gibson, 2011). In turn they suggest a firm’s capacity for debt-satisfying capabilities into the future (Gibson, 2011). This paper will use financial statement data as cited in Gibson (2011) from 3M Company (3M) to better understand liquidity measures to evaluate a firm’s total liquidity position. The following paper will focus on various liquidity calculations, their meaning, and their interpretation relative to 3M. Finally, an overall view of 3M’s liquidity position will be evaluated. By analyzing a company using ratios, one can evaluate the effectiveness of its management and its strengths and weaknesses (Žager, Sačer, & Dečman, 2012). A firm’s receivables account constitutes amounts owed to the company by customers, employees, or the government (Gibson, 2011). The account typically increases as a result of normal business operations where a company offers products or services to customers on account (Gibson, 2011). A company’s days’ sales in receivables is one of two measurement tools used to evaluate a firm’s trade receivables liquidity (Gibson, 2011). It is considered to be a gauge of a company’s ability to collect funds in relation to the credit terms it offers its customers (Bujaki & Durocher, 2012; Gibson, 2011). Essentially it calculates the average age of a company’s receivables account at the end of the year (Bujaki & Durocher, 2012; Gibson, 2011). As shown in Exhibit 1, 3M’s receivables were 51.28 days old in 2007 and 47.38 days old ... ... middle of paper ... ...es are the result of actual improvements in processes and not the effects of changes in accounting methods, relaxing of credit terms, or other manipulation (Gibson, 2011). Any negative trends should be examined and adjustments made to prevent further deterioration of the company’s liquidity position. Works Cited Bujaki, M., & Durocher, S. (2012). Industry identification through ratio analysis. Accounting Perspectives, 11(4), 315-322. http://dx.doi.org/10.1111/1911-3838.12003 Gibson, C. H. (2011). Financial reporting & analysis: Using financial accounting information. (12th ed.). Mason, OH: South-Western Cengage Learning. Žager, K., Sačer, I., & Dečman, N. (2012). Financial ratios as an evaluation instrument of business quality in small and medium-sized enterprises. International Journal of Management Cases, 14(4), 373-385. Retrieved from http://www.ijmc.org
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
The receivable has a significant increase as the sale’s revenue increase as well. Since the receivable is increasing each year, there might be higher uncollectable as well. The company also try to invest its excess cash; however, the result was not desirable, and the company stop the investment in 2015.
Overall, Horizontal analysis and financial ratios are essential factors that businesses use to monitor its liquidity. Therefore, in order to improve Apple’s ratios and profitability, the company needs to implement a strategy to increase the company’s liquidity. Business owners or managers should monitor current ratio and acid test ratio as these ratios help us to ensure the company has the proper liquid assets to pay current liabilities, to stay in operations and to expand the company. As we noted in our acid test ratio and current ratio for the company, we show a lower ratio for acid test ratio than the current ratio, which means that the company’s current assets rely on inventory. Therefore, the company needs to convert old inventory into
Refering to above liquidity analysis of Apple Inc. It can be easily infered that the company went into a liquidity trap during 2012 with falling current ratio and quick ratio providing evidence for it. However, the company improved its liquidity psoition during 2013 when the current ratio increased from 1.49 to 1.68 and quick ratio increasing from 1.47 to 1.67. Another important point to note was there is a very negligible difference between current ratio and quick ratio which means that inventory accounts for a very small portion of current assets.
In regards to the corporation’s balance sheet, it is necessary to place an importance on liquidity ratios to demonstrate the company’s ability to pay its short term obligations such as accounts payable and notes that have a duration of less than one year. These commonly used liquidity ratios include the current ratio, quick ratio, and cash ratio. All three ratios are used to measure the liquidity of a company or business. The current ratio is used to indicate a business’s ability to meet maturing obligations. The quick ratio is used to indicate the company’s ability to pay off debt. Finally the cash ratio is used to measure the amount of capital as well short term counterparts a business has over its current liabilities.
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
The average collection period is also referred to as the ratio of days to sales outstanding. It is the average numbers of days it takes a company to collect its accounts receivable. In other words, this financial ratio is the average number of days required to convert receivable into cash. The lower number is the better. Monsanto did its best at collecting during 2014 and its worst in 2012 but compared to Dow it didn’t do as well.
The accounts receivable was 25.55% in 2014. The sales revenue had increased from $55,519million in 2013 to $66,001million in 2014. This increase in credit sales resulted in net account receivable of $875million in 2014 from $100million in 2013.
By taking into account only the most liquid assets, ratio 1.0 in 2013 and 2012, which increased by a small margin 0.2 from 2011, indicates that company has strong liquidity position.
For bouth companies, balance sheets and income statements were downloaded from www.marketwatch.com (The Wall street Journal, January 8 2014). In that source, data on 5 years (instead of required 4) were provided, which would enable calculations of some average ratios where values in the beginning end the end of a year are necesarry. This was not used, and all calculated ratios were done with end year data.
Ratio analysis are useful tools when judging the performance of a company by weighing and evaluating the operating performance (Block-Hirt). There are 13 significant ratios that can separate by four main categories, profitability, asset utilization, liquidity and debt utilization ratios. The ratio analysis covered here consists of eight various ratios with at least one from each of these main categories. These ratios were used to compare and contrast the performance of Verizon versus AT& T over the years 2005 and 2006.
Helfert, Erich A. (2001). "The Nature of Financial Statements: The Income Statement". Financial Analysis - Tools and Techniques - A Guide for Managers. McGraw-Hill. p. 40.
The article Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy was written in 1968 by Edward I. Altman. The purpose of the article is to address the quality of ratio analysis as an analytical technique. At the time, some academicians were moving away from ratio analysis and moving toward statistical analysis. The article attempted to determine if ratio analysis should be continued, eliminated and replaced by statistical analysis or serve together with statistical analysis as cofactors in financial analysis. The example case used in the article was the prediction of corporate bankruptcy.
Any successful business owner or investor is constantly evaluating the performance of the companies they are involved with, comparing historical figures with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of any company's effectiveness, however, more needs to be looked at than the easily attainable numbers like sales, profits, and total assets. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Financial ratio analysis helps identify and quantify a company's strengths and weaknesses, evaluate its financial position, and shows potential risks. As with any other form of analysis, financial ratios aren't definitive and their results shouldn't be viewed as the only possibilities. However, when used in conjuncture with various other business evaluation processes, financial ratios are invaluable. By examining Ford Motor Company's financial ratios, along with a few other company factors, this report will give a clear picture of how the company is doing now and should do in the future.
A benchmarking analysis against competitors is provided in excel. These data indicate that Primo was performing poorly against its three competitors in terms of day’s receivable and day’s inventory. The fact that day’s payable was 40 days versus 30 days for the credit terms offered by its suppliers, and much higher than for its competitors, helps explain much of the reason for complaints from the company’s suppliers about late payments. In the future, Primo might have limited access to supplier credit, and suppliers might ultimately refuse to sell to the company unless payment is made up front in cash. The data also indicate that the company was performing poorly against its competitors in every profitability metric displayed.