Question

In your role as a financial analyst, you have been asked to analyze certain aspects of working capital management for The Kroger Co. (KR) and Sprouts Farmers Market, Inc. (SFM). In your analysis, you should consider the following:

a) Cash conversion cycle.

b) Liquidity.

c) Short-term financing versus long-term financing.

Answer 1

a. Cash conversion cycle (CCC): This metric measures the length of time that a company takes to convert its inputs into cash. Cash conversion cycle = days inventory outstanding+days sales outstanding-days payable outstanding

(Note all data have been taken from the 2017 annual reports of these 2 companies):

Calculation of cash conversion cycle of The Kroger Co:

CCC of The Kroger Co = (inventory/cost of sales + accounts receivables/net credit sales - accounts payable/cost of sales)*365

= (7781/95662 + 1637/122662 - 5858/95662)*365

= 54.53 days

CCC of Sprouts Farmers Market, Inc = (inventory/cost of sales + accounts receivables/net credit sales - accounts payable/cost of sales)*365

= (229542/3314487 + 25893/4664612 – 244853/3314487)*365

= 0.34

Thus CCC of The Kroger Co. is much higher than the CCC of Sprouts Farmers Market, Inc.

b. Liquidity will be measured using the current ratio. Current ratio = current assets/current liabilities.

Current ratio of The Kroger Co. = 11,117/14,197 = 0.783

Current ratio of Sprouts Farmers Market, Inc. = 299507/299714 = 0.999

Thus liquidity of Sprouts Farmers Market is greater than the liquidity of Kroger Co.

c. Short-term financing versus long-term financing: Short term financing refers to financing needs for a small period normally less than a year and are commonly known as working capital financing.

Kroger Co. has availed of working capital financing through trade credit and its accounts payable stood at $5,858 million for the fiscal year ended 2017. Sprouts Farmers Market also makes use of trade credit and its accounts payable stood at $244,853 million.

In terms of long term financing Kroger Co. has mainly availed of long term debt to the tune of $12,029 million and Sprouts Farmers Market has availed a long term debt of $348,000 million in 2017.