Using the ratios and information given below for PepCo Company, analyze the shor
ID: 2562025 • Letter: U
Question
Using the ratios and information given below for PepCo Company, analyze the short-term liquidity of the firm.
2015 2014
Current ratio .86 .80
Quick ratio .65 .61
Cash flow liquidity ratio .69 .62
Average collection period 32 days 30 days
Days inventory held 74 days 74 days
Days payable outstanding 157days 163 days
Cash conversion cycle (51 days) (59 days)
Cash flow from operations (in millions) $2,508 $2,232
Net sales (in millions) $13,957 $13,074
Explanation / Answer
2015
2014
Current ratio
0.86
0.80
Quick ratio
0.65
0.61
Cash flow liquidity ratio
0.69
0.62
Average collection period (days)
32
30
Days inventory held (days)
74
74
Days payable outstanding (days)
157
163
Cash conversion cycle (days)
-51
-59
Cash flow from operations (in millions)
$2,508
$2,232
Net sales (in millions)
$13,957
$13,074
Current ratio of company is 0.86 in years which more than current ratio in 2014. It means liquidity position of company improved.
Quick ratio considers only quick assets such as cash and cash equivalent, account receivable, short term investment. Quick assets exclude inventory. Quick ratio of company also improved quick position of company also improved.
Cash flow liquidity ratio measures how well a company can handle its short term debt with its cash and other liquid assets. Cash flow liquidity ratio is improved.
Average collection period increase from 30 days to 32 days. Collection period increase so, efficiency level for manage account receivable is decrease. Extra 2 days collection period given, which impact on increase in cash conversion cycle days.
There is no change in days inventory hold.
Days for account payable is decrease from 163 days to 157 days, company required to pay 6 days early compared to previous year.
Due to increase in average collection period and decrease in payable outstanding, cash conversion cycle reduced from (-59 days) to (-51 days).
Cash flow from operating activity is increase from $2232 million to $2508 millions. So, cash inflow is improved from business activity.
Results:-as per above analysis, liquidity position of firm is improve.
2015
2014
Current ratio
0.86
0.80
Quick ratio
0.65
0.61
Cash flow liquidity ratio
0.69
0.62
Average collection period (days)
32
30
Days inventory held (days)
74
74
Days payable outstanding (days)
157
163
Cash conversion cycle (days)
-51
-59
Cash flow from operations (in millions)
$2,508
$2,232
Net sales (in millions)
$13,957
$13,074
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