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Working capital: A summary of ratios by industry case Case Solution & Answer

Working capital: A summary of ratios by industry case

Days Payable Outstanding (DPO) Ratio

The days’ payable outstanding ratio shows that in how many days the company pays the cash to the suppliers and wholesalers. Working capital shares a negative relationship with the accounts payable. As the number of payables increases the value of working capital decreases.

The higher DPO is more advantageous for the company because in that situation the company has the higher days to pay the bills and other debts to the creditors. Tesla, Dell, HP, Amazon, and Apple have the higher DPO of 168.3, 162.2, 120.5,111.2, and 93 days respectively. It means these companies take the advantage of a higher DPO ratio and invest the money in another project for that period. Kroger has the lowest ratio of DPO which means that the company has to pay the suppliers in 23 days. Costco and Nordstrom pay the cash to suppliers in 31.7 and 38.9 days respectively. Ford and Boeing take about 51 to 52 days to pay the amount of money to the suppliers.  The companies have the highest DPO because they purchase a higher amount of inventory in which they invest the money and increase the period of suppliers’ payment.

And the companies which have a lower DPO ratio mean the companies are not fully employing the period which creditors offered them during providing the credit.

Cash Conversion Cycle (CCC) Ratio

The CCC measures how rapidly the company can convert the present cash the company to generate more cash with the effectiveness of the corporation. The prime responsibility of the Cash Conversion Cycle is to convert the accounts payable and inventory into accounts receivable and sales and then convert the sales and account receivables into cash. As rapidly the company converts the inventories into cash the working capital of the company also increases which means the CCC and working capital are directly proportional to each other.

Dell, Amazon, and Apple have a negative cash conversion cycle which means that the company converts the cash before the period and this is the most beneficial for the companies that’s why Apple, Amazon, and Dell are well-known and most innovative companies in the world. Costco, Kroger, and Walmart have also the lower ratio of CCC. They also convert the cash into 3.4, 8.3, and 8.9 days respectively.  The Tesla automobile corporation converts the cash into 32.3 days whereas the décor company of United states JC Penny takes 64.7 days. The HP has to collect the cash in 70 days and the Boeing and Nord storm take 156.2 days to convert the cash. The highest time is taken by the Ford Corporation to convert the cash into more amount of cash. Ford and other companies which have a higher value of Cash Conversion Cycle are due to the management of the corporation taking a lengthy in the collection of accounts receivables. Another reason is the company has higher inventory in hand and the company frequently pays the expenses and has a higher Cash Conversion Cycle Ratio.

Conclusion

After analyzing the ratios of all the companies we conclude this report that some of the companies have a strong financial position and they recover their payables in a very short time and also collect the cash in a few days with higher revenue from products. The relationship of working capital with these ratios and why some companies have higher and some them have lower ratios. These all points are discussed in the above solution. The Graphs are also attached in the Appendices portion for an enhanced consideration of the development of all the company’s ratios on a single platform….

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