Liquidity Ratio Of Kellogg Co 2013–2015 Current Assets

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Liquidity ratios, activity ratios, profitability ratios, leverage ratios, and coverage ratios are essential tools in financial analysis, providing insight into a company's operational efficiency, liquidity, profitability, and solvency. This paper examines these ratios for Kellogg Company and Target Corporation over a three-year period, using data extracted from their annual reports, to compare their financial health and performance.

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Introduction

Financial analysis through ratio measurement is a core component of understanding a company's performance and financial health. It allows stakeholders to evaluate operational efficiency, liquidity, profitability, leverage, and ability to meet long-term obligations. This study focuses on Kellogg Company, a multinational food manufacturing firm, and Target Corporation, one of the leading discount retailers in the United States, analyzing their financial ratios from 2013 to 2015.

Liquidity Ratios

Liquidity ratios measure a company's capacity to meet its short-term obligations using its most liquid assets. The primary ratios in this context are the current ratio and quick ratio. The current ratio reflects whether a company has enough current assets to cover its current liabilities, with a benchmark of at least 2:1 indicating good short-term financial health (Johnstone, 2009). The quick ratio refines this by excluding inventories, which may not be readily convertible to cash, thereby providing an even stricter measure of liquidity.

Kellogg's current ratio from 2013 to 2015 was consistently below 1, standing at 0.85, 0.77, and 0.56 respectively, indicating insufficient current assets relative to current liabilities, which may signal liquidity challenges (Table 1). Conversely, Target's current ratios were slightly higher but still below the recommended threshold, at 0.91, 1.20, and 1.12 over the same period. The quick ratios for Kellogg were notably low at 0.53, 0.47, and 0.35, suggesting limited liquidity when inventories are excluded, which could impair the company's ability to cover urgent liabilities. Target's quick ratios, at 0.22, 0.45, and 0.44, were somewhat more favorable but still below the ideal level.

These findings suggest that over the period, both companies faced liquidity constraints, with Kellogg's weaker position being more marked. Factors influencing these ratios include inventory levels and the companies' operational cash flow strategies.

Activity Ratios

Activity ratios assess how efficiently a company manages its assets to generate sales. Key ratios analyzed include inventory turnover, receivables turnover, and total asset turnover.

Kellogg's inventory turnover improved slightly from 6.65 to 6.99 over the three years, indicating a relatively efficient inventory management, aligning with Target's turnover figures around 6.84 to 7.53. The receivables turnover for Kellogg remained high at approximately 12.6 to 12.8, with days sales outstanding (DSO) around 28-30 days, indicating prompt collection of receivables. Target's receivables turnover was similar, also suggesting efficient receivables management.

Total asset turnover for Kellogg stayed stable at approximately 1.5, implying consistent utilization of assets to generate sales. Similar metrics for Target support the conclusion that both companies maintain effective operational efficiency, although their low liquidity ratios might constrain short-term operations.

Profitability Ratios

Profitability ratios illustrate how well a company generates profit relative to sales, assets, and equity. The key ratios include gross profit margin, operating profit margin, net profit margin, return on assets (ROA), and return on equity (ROE).

Kellogg exhibited strong gross profit margins of approximately 41.26%, 34.73%, and 34.61%, significantly exceeding Target's margins (around 30.38%, 29.53%, 29.39%). This indicates Kellogg's more effective management of cost of goods sold and pricing strategy. Operating profit margins for Kellogg ranged from 19.18% to 8.07%, outperforming Target's margins of about 7.33% to 6.25%. Similarly, net profit margins for Kellogg were substantially higher—ranging from 12.20% to 4.54%—compared to Target's 4.09%, 2.72%, and negative figures in 2015.

Return on Assets (ROA) for Kellogg was robust, at approximately 11.79%, decreasing to 4.04% in 2015, but still superior to Target's ROA figures, which were around 6.33%, turning negative in 2015. Return on Equity (ROE) was particularly high for Kellogg—around 60.60%—reflecting efficient utilization of shareholders’ equity, whereas Target's ROE was modest at around 18.52%.

Leverage and Coverage Ratios

Leverage ratios, including debt-to-equity and debt ratio, measure the extent of a company's financed debt relative to its equity and total assets. Although specific figures are unavailable in data, the high profitability ratios suggest effective leverage management for Kellogg. The coverage ratios, which assess a company's capacity to service its debt, indicate Kellogg's superior ability to meet its obligations, supported by its high ROE and profit margins.

Discussion and Conclusion

The analysis reveals that Kellogg demonstrated superior profitability ratios and efficient asset management compared to Target over the examined period. Despite weaker liquidity ratios, Kellogg's high profitability indicates a strong operational position. Conversely, Target's liquidity ratios below standard levels suggest potential liquidity risks, although its operational efficiency remains acceptable.

The divergence in financial health highlights differing strategic priorities: Kellogg's focus on maximizing profitability and operational margins despite liquidity constraints, and Target's balanced but less profitable approach. For investors and managers, these insights underscore the importance of integrating multiple ratios in financial decision-making and considering the company's overall business model and industry context.

In conclusion, ratio analysis provides vital insights into financial performance. Kellogg's higher profitability and efficiency ratios affirm its competitiveness, though liquidity management warrants attention. Target, while operationally efficient, must address its liquidity position to ensure sustainability. Continuous monitoring of these ratios allows stakeholders to make informed decisions regarding investments, credit, and strategic planning.

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