Question

Neiman Marcus and Kohl's: Short- term liquidity analysis REAL WORLD Neiman Marcus Group is one of the largest luxury fashion retailers in the world. Kohl's Corporation sells moderately priced private and national branded products through more than 1,100 department stores located throughout the United States. The current assets and current liabilities at the end of a recent year for both companies are as follows (in millions): Neiman Marcus Kohl's Current assets: Cash Inventories Other current assets Total current assets $ 197 1,069 $1,407 3.814 $1410 $5.698 Current liabilities: Accounts payable Other current liabilities Total current liabilities $ 375 482 $ 857 $1,511 1.348 $2,859 1. - Would an analysis of working capital between the two companies be meaningful? Explain. 2. Compute the quick ratio for both companies. (Round to the nearest decimal.) Interpret your results. 4. Remember what is considered a "quick asset." Also, are these companies a suitable comparison as retail department stores? Why or why not? This could also be answered as a part of question #1. Why is it important to compare your business to another? What would that indicate for the analysts and/or management of a business?

Answer 1

Answer 1

Neiman Marcus group is largest luxury fashion retailers in world and Khol's corporation sells moderately priced national and private branded products both companies does not belong in same industry working capital analysis between both companies many not be meaningful

Answer 2

Quick ratio = (cash+marketable securities+Accounts receivable)/ current liabilities

Neiman Marcus Group = $197/ $857 = 0.23

Khols corporation = $1407/ $2859 = 0.49

Answer 3

Khols corporation has a quick ratio of 0.49 as compared to 0.23 in case of Neiman Marcus Group. Khols corporation has better overall liquidity particularly in a crunch situation.

Answer 4

Quick ratio is an indicator of most readily available current assets to pay off short-term obligations. It is particularly useful in assessing liquidity situation of companies in a crunch situation, i.e. when they find it difficult to sell inventories.

Inventories are also excluded because they are not directly convertible to cash, i.e. they result in accounts receivable which in turn results in cash flows and because their net realizable value drops when they are sold in panic situation.

Quick ratio’s independence of inventories makes it a good indicator of liquidity in case of companies that have slow-moving inventories, as indicated by their low inventory turnover ratio.

Quick ratio should be analyzed in the context of other liquidity ratios such as current ratio, cash ratio, etc., the relevant industry of the company, its competitors and the ratio’s trend over time. A quick ratio lower than the industry average might indicate that the company may face difficulty honoring its current obligations. Alternatively, a quick ratio significantly higher than the industry average highlights inefficiency as it indicates that the company has parked too much cash in low-return assets. A quick ratio in line with industry average indicates availability of sufficient good quality liquidity.