ACCT1046 – Accounting in Organisations & Society

Question 1:

Overall, WEN maintained adequate liquidity to meet its short-term obligations over the period of 2015-2019. Despite fluctuations, the current ratio remained above 1.5x, which implied that WEN had at least 1.5$ of current assets to pay each dollar of its current liabilities. The quick ratio was still higher than 1.0x, which indicated that WEN was able to meet its current liabilities without relying on selling its inventories. Even though WEN had sufficient capacity to pay short-term obligations, the downtrend of the current ratio and quick ratio in 2015-2019 should be taken into consideration, except for 2018. The surge in the net interest income and others in 2018 might be the main factor raising the cash and short-term investments. As a result, it relatively raised the current ratio and quick ratio.

In terms of efficiency, WEN witnessed a decline in managing assets and liabilities efficiently. The number of days to collect the outstanding account receivables reached a peak of over 32 days in 2017 and then felt to 23 days in 2019. Though there were variations in the days sales outstanding, it tended to increase in later years compared to 2015. This increase showed that WEN was less efficient at managing its receivables. The payable period had a contradictory tendency, but further indicated the inefficiency in WEN’s operation. Based on the decrease in its days payable outstanding from 20.68 to 7.35, the ability to retain the available sources from suppliers, vendors, creditors to maximize profits was deteriorated. The increase in the number of days collecting sales and the decline in the number of days paying its liabilities caused the increase in the cash conversion cycle, from -1.32 days in 2015 to 16.94 in 2019. Since the proportion of inventory accounted for a small part of total assets, the inventory turnover time was not taken into account to evaluate the firm’s efficiency.

Regarding solvency, WEN increased financial leverage but still retained its strong ability to cover interest obligation. The financial leverage appeared to strongly increase, from 5.56 in 2015 to 9.67 in 2019, which means that each dollar of equity supports 9.57 dollars of total assets. The rises in financial leverage might be used to finance the rises in the proportion of Properties, Plants and Equipment, accounting for 40.73% of total assets in 2019 compared to 29.89% of total assets in 2015. The increase in financial leverage indicated the increase in debts and other liabilities in WEN’s capital structure, possibly resulting in weakening the firm’s solvency and rising default risks. However, the interest coverage was kept at 3.3 times, on average, over the period of 2015-2019. Despite rising financial leverage, the company was still able to generate earnings to service its debts and other obligations.

In conclusion, based on three different categories of financial ratios including liquidity, efficiency, solvency, WEN appeared to have strong liquidity to maintain its business activities and ability to meet its obligations to suppliers, vendors, creditors. However, it witnessed the acceleration of financial leverage and less efficiency at managing cash flow from its receivables and payables.

Question 2:

In terms of liquidity, WEN appeared to have strong liquidity since the current ratio and quick ratio was always kept above 1.0x in the period between 2015 and 2019. In contrast to WEN, SBUX witnessed strong volatility of liquidity when the current ratio decreased from 2.2x in 2018 to 0.92 in 2019. After excluding the presence of inventory, the quick ratio was mostly below 1.0x in the period 2015-2019, indicating that SBUX did not have sufficient capacity to pay its short-term obligations. Regarding QSR, the current ratio remained above 1.0x over the past five years. Despite some fluctuations, QSR had a positive sign in liquidity since its quick ratio increased to 1.21 in 2019, compared to 0.97 in 2018.

In terms of efficiency, WEN’s inefficiency in cashflow management was proven by the increase days receivables and the decrease days payables. SBUX was in the opposite direction. It appeared to be more efficient when decreasing the number of days to collect money from customers and increasing the number of days to settle the payables to its suppliers, vendors, creditors. Because inventory accounted for a relatively large number of total assets, the days inventory needs considering. In particular, the days inventory had a tendency to decrease in 2015-2019. It was a positive signal for the improvement in the firm’s efficiency. QSR had the most impressive cash flow management. Its payables period increased while days sales outstanding decreased overtime. The decrease in the number of days receivables might indicate that QSR had a strong bargaining power towards its customers. The increase in the number of days payable (from 46 days in 2015 to nearly 90 days in 2019) might suggest an inability to pay suppliers; however, it was not in QSR’s case. The proportion of cash and short-term investments in total assets was always bigger than that of accounts payable over the period 2015-2019, which indicated that QSR had enough capacity to pay suppliers sooner if it chose to do so. The long payable period might be explained as the company took advantage of the favorable credit terms granted by its suppliers.

In terms of solvency, WEN’s financial leverage exhibited the increase from 5.46 to 9.67 in 2015-2019 but still retained its strong ability to cover interest obligations. Regarding SBUX, its financial leverage witnessed a substantial increase by 10 times more in 2019 compared to 2015. Meanwhile, its interest coverage decreased over time. As can be seen, SBUX had to face a huge potential of solvency risk. Though QSR’s financial leverage was higher than WEN and SBUX, it tended to decrease to 8.9 % in 2019 compared to 13.77 in 2015, indicating the improvements in its solvency. The interest coverage was steady, at 3.38 times, on average.

From an investor perspective, QSR is the most potential firm to cooperate with since it has improved liquidity, lowered financial leverage, stable interest coverage, and especially, remarkable ability in managing cash flow.