Comparing the quick ratio vs. the current ratio, it can be noted that the decrease in quick ratio than the current ratio is higher in the case. This means that the inventory turnover may have not much contribution over the decrease in the liquidity of the company. In fact, it may be that the sales are increasing but there may be other reason on the play for the decrease in the liquidity.
One of the prominent reasons could be due to use of cash from previous year in additional investment or more use of cash to support asset bought from previous year. This last reason looks more legitimate that the previous reasons.
If we look at the sales trend in the annual report of the company, then it shows that the sales have been increased by 60203000, which is 13.5% more than previous year. So saying that the sales are declining is not justifiable. However it could be that the inventory on hand is increasing. If we calculate the inventory turnover, it could be seen that the inventory on hand has increased to 64 days from 42 days.
So what could be reason for this?
If we look further at the annual report, it shows that the expenses have been increased in the section plants and other expenses. This brings down all the suspense at once. All the figures now start to make sense. The increase in inventory, the reduction in liquidity, and all of them now makes sense. It can easily be interpreted that Clearwater is investing on plants so as to increase its productivity. The increase in the day inventory on hand is also a byproduct of the action of more investment in the production.
Is this good for the company? We cannot say now. Because if the sales now further increase in the future it would be good and if the sales grow at low rate, the result may not be good in the future. However, no matter whatever the future might, the decrease in the liquidity of the company is well justified. The current ratio of 1.26 also don’t seem to be too bad for now as company still can retaliate its current debt positively.
