It is critical to analyze Mission Furniture’s Statement of Income and Balance Sheet, as both are used to understand the company’s Cash Conversion Cycle (CCC) and its overall financial health. Using data from 2016 to 2017, PP recognizes that Mission Furniture has a production cycle of 146 days (average inventory of $187M, inventory turnover rate of 2.5). While the furniture company experiences a longer production cycle than some companies, an inventory turnover rate of 2.5 is quite normal in the furniture industry, especially considering what materials it takes to make high-quality furniture (Furniture & Fixtures Industry,
2023). However, this is not enough to agree to lease the space. The company’s average accounts receivable (using data from 2016 to 2017) is $27.5M, their accounts receivable turnover rate is 36 times, and their collection cycle, therefore, takes approximately 10.1 days, meaning customers pay within two weeks, which is excellent for stability. Finally, their average accounts payable is $21.3M, with a turnover rate of 21.91 times and an accounts payable cycle of XXXXXXXXXXThe company takes over two weeks to pay its suppliers, giving it a CCC of XXXXXXXXXXdays, a normal for the furniture industry. At the end of 2017, the company had a debt ratio of only .12, which means that it has 12 cents of debt for every dollar, much better than in 2015. Additionally, the company in 2017 had a times interest earned of XXXXXXXXXXand a cash coverage ratio of XXXXXXXXXXI suggest PP lease to Mission Furniture, especially since they have low debt, fall into a normal CCC for their industry, and have a tremendous cash coverage ratio, which means it can generate cash from operations to meet financial obligations (Brooks, 2019, p. 435).
Brooks, R. M. (2019).Financial Management: Core Concepts(4th ed.). Pearson.
Furniture & Fixtures Industry. Furniture & Fixtures Industry Efficiency, Revenue per Employee, Inventory and Receivable Turnover Ratios Q XXXXXXXXXXRetrieved April 25, 2023, from https://csimarket.com/Industry/industry_Efficiency.php?ind=407
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