In order to determine the liquidity the most extensively used measurement is

In order to determine the liquidity the most

This preview shows page 8 - 10 out of 12 pages.

In order to determine the liquidity the most extensively used measurement is the current ratio which is just the ratio of the current assets to current liabilities. General Mills reports a current Page 8 of 12
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account ratio of 0.8183, which indicates some level illiquidity since typically having a current ratio under one shows that a company may struggle to pay short-term and long-term obligations. However, current ratio cannot be used as a sole representation of liquidity, it assumes the company has the ability to liquidate of all of a company's current assets instantaneously to meet its current liabilities. In reality, the time it takes to convert its assets into cash is more important than just the gross current assets. Thus, turning to the inventory turnover ratio and comparing the 2014 Food Processing industry average of 8.01 [SCI] shows us that despite Kraft being more liquid from the current ratio it actually underperforms the industry in its ability to rapidly turn over their inventories. Similarly, General Mills also underperformed the industry average to greater extent, indicating some level of inefficiency for operation potentially as a result of their significantly larger size relative to the industry resulting in diseconomies of scale. Through the application of Cash to Current Debt Ratio, which is a type of coverage ratio which measures the ability for a company to meet its financial obligations, we can compare liquidity based off this metric. In 2014, Kraft actually had a lower Cash to Current Debt coverage than General Mills that could likely be attributed to the poor performance over the year and obligation to maintain their large dividend payments. Further on the current ratio, if the business has negotiated fast payment or cash from customers, and long terms from suppliers, it may have a very low current ratio and yet be very healthy. Looking at receivables turnover where the industry average was 13.96 we see that General Mills is underperforming and Kraft is outperforming the industry. This indicates that Kraft has substantially more efficient collection and credit policies where as General Mills may have a debt collection problem resulting in a low value. This value compounds the findings from the current account ratio and while the Cash to Current Debt Coverage may favour General Mills we can conclude that Kraft is more liquid. Next an analysis of the two companies’ degree of solvency, or ability to meet long term fixed expenses and accomplish long term growth. In 2014, Kraft faced a heavy restriction on their working capital due to their loss of market share and stalling sales growth which resulted in from close to $1.5 billion in 2013, to only $18 million at the end of 2014. However, despite this Kraft was committed to maintaining their dividend payout and actually increased dividends paid despite the poor fiscal year. This provides stability for investors who are some of the main providers of capital however hampers their ability to reinvest earnings into their products. Kraft
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  • Winter '14
  • FotiniTolias
  • First Assignment, H. J. Heinz Company, Kraft Foods Inc., Kraft Heinz

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