Question
Page 179, Figure 6-11: Is there a mistake in the legend? (The legend is the box with labels on the figure.) Explain. Figure 6-11 depicts
Page 179, Figure 6-11: Is there a mistake in the legend? (The "legend" is the box with labels on the figure.) Explain.
Figure 6-11 depicts the combined net working capital ratio and the current ratio for five large industrial companies: Caterpillar, United Technologies, 3M, Boeing, and ExxonMobil. These financially strong companies exhibit the same pattern as that of the S&P industrials. During a recession, sales decline or stay even, but cash, receivables, and inventory fall and short-term debt may rise, causing a large decline in the net working capital to sales ratio. As the firms profitability increases during the upswing, cash, receivables, and inventory rise, and short-term debt may fall or be replaced by low-cost long-term debt in the low-interest rate environment of a recession. These two effects cause the ratio to rise. Figure6-11 clearly shows the cyclical nature of working capital to sales. The ratio bottoms out in the recession of 2008 and makes a steady increase as these companies build up their cash balances and inventories. Because of the uncertainty surrounding the economy, many companies opted to hold larger cash balances for future stock repurchases, mergers, or dividend increases .However, the low current ratios of between 1.2 and 1.5 since 2000 (right scale) can be traced to more efficient inventory management such as just-in-time inventory pro-grams, point-of-sales terminals, more efficient cash management, electronic cash flow transfer systems, and the ability to sell accounts receivable through the securitization of assets.
Figure 6-11 Net working capital as a percentage of sales and the current ratio Working capital to sales expressed as % 18 Average current ratio - Average working capital to sales (%) Current ratio 1.8 16 1.6 14 1.4 12 1.2 10 0 1.0 8 0.8 8 0.6 -0.4 2- -0.2 0 0 C01 1999 C01 2000 CO1 2001 C01 2002 CO1 2003 CQ1 2004 CQ1 2005 CQ1 2005 CQ1 2007 CO1 2008 CQ1 2009 CQ1 2010 CO1 2011 CQ1 2012 C01 2013 C01 2014Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started