Question

1. What do the liquidity ratios – Current, Quick, and Cash-to-Sales – reveal about JCP’s financial position? Given that:

   Liquidity ratios – Current, Quick, and Cash-to-Sales ---

   Current Ratio: Current Assets/Current Liabilities-

   2012: 3,683/2,568= 1.43

   2011: 5,081/2,756= 1.84

   2010: 6,370/2,647= 2.40

   Quick Ratio: (Current Assets-Inventory)/Current Liability

   2012: (3,683-2,341)/2,548= 0.52

   2011: (5,081-2,916)/2,756= 0.78

   2010: (6,370-3,213)/2,647= 1.19

   Cash To Sales Ratio: Cash balance at the end of the period/Sales

   2012: 930/12,985= 0.05

   2011: 1,507/17,260= 0.08

   2010: 2,622/17,759= 0.14

Answer 1

The company’s current ratio has been declining on a year-on-year basis. It was 2.40 in 2010 and declined to 1.84 in 2011. It then declined to 1.43 in 2012. This shows that the company’s liquidity position is deteriorating. It should be noted that current ratio measures the ability of the firm to meet its current liabilities – current assets gets converted into cash in the operating cycle of the firm. This provides funds needed to pay current liabilities. A year on year reduction in current ratio is a cause of concern for JCP and the situation will become all the more alarming if it falls below 1.

Just like current ratio the company’s quick ratio is also declining on a year on year basis. Quick ratio is a fairly stringent measure of liquidity and is based on those current assets that are highly liquid. Inventories are excluded as inventories are deemed to be the least liquid component of current assets. Declining quick ratio is also a cause of concern for JCP with regards to its liquidity position.

Cash to sales ratio shows the ability of a firm to generate cash flow in proportion to its sales. Here the cash to sales ratio is declining for JCP and this can be because JCP is pursuing incremental sales that are generating a smaller amount of cash. It can also be because the company is offering more favorable credit terms to its debtors and if this is the case it will cause working capital problems for the company in future.