Question

18-1. (Related to Checkpoint 18.1 on page 573) (Measuring firm liquidity) The following table contains current asset and current liability balances for Deere and Company (DE): 2008 2007 2006 1,687,500 ($ thousands) Current assets Cash and cash equivalents Short-term investments Net receivables Inventory Total current assets 2,211,400 0 3,944,200 3,041,800 9,197,400 2,278,600 1,623,300 3,680,900 2,337,300 9,920,100 3,508,100 1,957,300 7,152,900 Current liabilities Accounts payable Short-term/current long-term debt Other current liabilities Total current liabilities 6,562,800 8,520,500 4,666,300 8,121,200 3,186,100 9.969,400 2,766,000 15,921,500 0 15,083,300 12,787,500 a. Measure the liquidity of Deere & Co. for each year using the company's net working capital and current ratio. b. Is the trend in Deere's liquidity improving over this period? Why or why not?

Answer 1

Answer to Q#18-1 (First question in the list): a) Net working capital = Total current assets - Total current liabilities Current ratio = Total current assets / Total current liabilities Total current assets Total current liabilities 2008 $9,197,400 $15,083,300 2007 $9,920,100 $15,921,500 2006 $7,152,900 --> (a) $12,787,500 --> (b) Therefore, Net working capital $5,885,900 $6,001,400 $5,634,600 --> (a) - (b) Current ratio 0.61 0.62 0.56 --> (a) / (b) b) Net working capital is nothing but the difference between firm's total current assets and total current liabilities. Positive net working capital implies that the firm has more total current assets than total current liabilities. On the other hand, negative net working capital implies that the firm has less total current assets than total current liabilities.

Current ratio is nothing but the ratio of total current assets to total current liabilities. A current ratio of greater than 1.0 implies that firm has stronger liquidity position. A current ratio of less than 1.0 implies that firm has weaker liquidity position. Conclusion: It is observed that net working capital is negative over past three years which implies that firm doesn't have sufficient total current assets to obsorb total current liabilities. It is not a good sign as for as firm's liquidity position is concerned. It doesn't show any constant trend because it decreased in 2007 from 2006 but increased in 2008 from 2007 though it didn't increased beyond 2006's net working capital. It is observed that current ratio is less than 1.0 over past three years which implies that firm's firm doesn't have sufficient total current assets to obsorb total current liabilities. It is not a good sign as for as firm's liquidity position is concerned. It doesn't show any constant trend because it increased in 2007 from 2006 but decreased in 2008 from 2007. As for as 2008's liquidity position is concerned, firm's liquidity position has increased beyond 2006's current ratio.