How to Measure Liquidity, Part 3

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This is the third and last article in a three-part series on how to measure company liquidity.  Part 1 and part 2 can be found here:

How to Measure Liquidity, Part 1
How to Measure Liquidity, Part 2

Boeing is a company with very tangible assets.  You can see and touch their manufacturing and fabrication facilities.  You could watch vendors bring shipments of parts and materials to these buildings, and watch assembled aircraft and technology, roll out the door.  Parts, planes, plants – they all cost money and have real value.  At any given time, Boeing has at least some level of cash, securities, receivables, and inventory.  They also likely have a series of creditors they need to make regular payments.  These items play perfectly into a liquidity analysis:

he Boeing Co. liquidity analysis (all figures as of 2009; all figures in millions.)

The current ratio is 1.07. While a fairly healthy level, the current ratio just over 1.0 indicates Boeing can only cover its short-term liabilities once.

The quick ratio is below 1.0, which 0.52 indicates that the firm has low liquidity levels and relies heavily on its receivables to pay short-term debts.

The cash ratio is also below 1.0, and at 0.34 an is less than the quick ratio value of 0.52. This low liquidity level indicates the firms cash and marketable securities are not enough to pay its short-term debts and Boeing is relying heavily on accounts receivable.

Inventory turnover of 3.34 means that Boeing has moved its inventory about 3 times in
2009 and while this is a low number by itself, it is normal for the aerodynamics industry where inventory moves slowly due to a long sales cycle.

Boeing’s basic defense interval ratio of 644 suggests that the firm will be able to
cover almost 2 years worth of daily cash expenses with its current assets.

Working capital and accounts receivable turnover are at acceptable levels,
but still lower than the industry averages.

Liquidity Analysis:

Overall, I would give Boeing an average grade for liquidity. Boeing management may
want to consider holding more cash and short-term securities to improve its short-term
debt-paying ability and working capital figure. When assessing liquidity, it is important
to remember that each company is different and each industry is different. Comparing ratios to industry averages will provide the clearest picture of not only liquidity, but the
firm’s financial condition in general.

That concludes this series on How to Measure Liquidity.  We hope it was helpful and welcome all comments, and if you want us to expand on the subject, tell us!

Go back to:
How to Measure Liquidity, Part 1
How to Measure Liquidity, Part 2

References

North Carolina State University. Financial Statement Ratios.
Retrieved on 10/26/2010 from http://www2.acs.ncsu.edu/UPA/auth/compliance/standards/resource_2_measures.htm

Muro, Vincent. (1998). Handbook of Financial Analysis for Corporate Managers. New York AMACOM Books.

Arkady Feldman, Libman Matan. (2007). Crash Course in Accounting and Financial Statement Analysis. Hoboken, N.J John Wiley & Sons, Inc.

Friedlob, G. Thomas. Schleifer, Lydia L. F. (2003) Essentials of Financial Analysis. Hoboken, N.J. John Wiley & Sons, Inc.

Morningstar. The Boeing Company. Retrieved on 10/25/2010 from http://quote.morningstar.com/Stock/s.aspx?t=BA