Question

1. Cash Conversion Cycle & Ratios

Target

Sales = 74,433,000,000

Cost of goods sold = 53,299,000,000

Inventory = 9,497,000,000

Accounts receivable = 468,000,000

Accounts payable = 1,127,000,000

Inventory conversion period = 65.04

Average collection period = 2.29

Payables deferral period = 7.72

CCC = 59.61

Nike

Sales = 36,397,000,000

Cost of goods sold = 20,441,000,000

Inventory = 5,261,000,000

Accounts receivable = 3,498,000,000

Accounts payable = 2,279,000,000

Inventory conversion period = 93.94

Average collection period = 35.08

Payables deferral period = 40.69

CCC = 88.33

McDonalds

Sales = 21,025,000,000

Cost of goods sold = 2,200,000,000

Inventory = 51,100,000

Accounts receivable = 2,441,500,000

Accounts payable = 1,207,900,000

Inventory conversion period = 8.48

Average collection period = 42.39

Payables deferral period = 2.00

CCC = 48.87

Best Buy

Sales = 42,151,000,000

Cost of goods sold = 32,275,000,000

Inventory = 5,209,000,000

Accounts receivable = 1,049,000,000

Accounts payable = 4,873,000,000

Inventory conversion period = 58.91

Average collection period = 9.08

Payables deferral period = 55.11

CCC = 12.88

Amazon

Sales = 232,887,000,000

Cost of goods sold = 139,156,000,000

Inventory = 17,174,000,000

Accounts receivable = 16,677,000,000

Accounts payable = 38,192,000,000

Inventory conversion period = 45.05

Average collection period = 26.14

Payables deferral period = 100.18

CCC = -28.99

*Compare and analyze thoroughly the CCC for the five companies

1. Analyze the CCC for the five companies. How does the CCC compare across the different companies?

2. Analyze the relationship between CCC and the company’s profitability for all five companies

3. Analyze the relationship between CCC and the size of the company (measured by total assets) for all five companies

Answer 1

Compare and analyze thoroughly the CCC for the five companies

Cash Conversion Cycle depicts time it takes for a firm to convert the inventory into cash from the sales. So, if we assume there are 360 days in a year and there are two companies with CCC of 60 and 180 respectively. Using the same amount of investment first company can run 6 cycles(360/6) of inventory to cash from sales, where as 2nd company can have only 2 cycles (360/180).

Hence, it depicts efficiency of operating cycle of the company.

1. Analyze the CCC for the five companies. How does the CCC compare across the different companies?

Of the companies given above, Nike has the highest CCC where as Amazon has lowest CCC. It means Nike takes 88.33 days to convert its investments in the inventory into cash from the sales. Similarly BestBuy takes only 12.88 days for the same. Negative CCC for Amazon means that Payable period for it is very high, it means Amazon is actually working on a negative capital and actually does not need to invest cash in its own operation, cash needed for its operations are actually funded by its accounts payables.

2. Analyze the relationship between CCC and the company’s profitability for all five companies

Although it is expected that company with lower CCC will be more profitable, but that is not actually true. CCC only depicts operational efficiency, a company with very low CCC might still be a loss making company.

For example profitability of BestBuy = 1 - (COGS/Sales) = 23%
for McDonalds profitability = 90%

Hence although CCC for McD is 48.87 as compared to 12.88 for BestBuy, still McDonalds is more profitable.

3. Analyze the relationship between CCC and the size of the company (measured by total assets) for all five companies

CCC is also not correlated with the size of the company. CCC only takes into account two assets, i.e. Inventory and accounts receivable, but size of the company also takes into account other assets like Fixed Assets etc. So we can not construe a direct relationship bewteen CCC and size of the company.