Dollar Tree Inc. (DLTR) and Wal-Mart (WMT) to calculate their cash conversion cycles

Question

Go to finance.yahoo.com and collect data for Dollar Tree Inc. (DLTR) and Wal-Mart (WMT) to calculate their cash conversion cycles.

You can enter the ticker symbol (DLTR for example) in the “quote lookup” box toward the right side to search for each firm individually. Once the company comes up, you can click on the “financials” tab. The income statement will pop up and you can click on the balance sheet button to access that financial statement. Use the current year’s annual data to find: Sales (Revenue), Cost of Revenue (Cost of Goods Sold), Inventory, Accounts Receivable, and Accounts Payable.

a.Calculate the cash conversion cycle for both firms.

b.Which store has the better cash conversion cycle?

c. What impact would it have on the cash conversion cycle if Wal-Mart decided to offer an in-store credit card and customers on average took 30 days to pay?

Solution

Wal Mart for the year 2017

Sales (Revenue) = 485,873,000

Cost of Revenue (Cost of Goods Sold) = 361,256,000

Inventory = 485,873,000

Average Inventory = (Beginning Inventory + Ending Inventory) / 2 = (44,469,000 + 43,046,000) / 2

= 4,37,57,500

Accounts Receivable = 5,835,000

Average Accounts Receivables = (5,835,000 + 5,624,000) / 2 = 57,29,500

Accounts Payable = 63,008,000

Average Accounts Payable = (63,008,000 + 58,615,000) / 2 = 6,08,11,500

Dollar Tree Inc.

For the year 2017

Sales(Revenue) = 20,719,200

Cost of Revenue (Cost of Goods Sold) = 14,324,500

Inventory = 2,865,800

Average Inventory = (Beginning Inventory + Ending Inventory) / 2 = (2,865,800 + 2,885,500) / 2

= 28,75,650

Accounts Receivable = 0

Average Accounts Receivables = 0

Accounts Payable = 1,209,600

Average Accounts Payable = (1,209,600 + 1,264,800) / 2 = 12,37,200

Here we consider average inventory, average accounts receivable and average accounts payable.

Wal Mart

Cash Conversion cycle = [( 43757500 / 361256000 ) + ( 5729500 / 485873000 ) - ( 60811500 / 361256000) ] * 365

= -12.93 days

Dollar Tree Inc.

Cash Conversion Cycle = [( 2875650 / 14324500) + ( 0 ) - ( 1237200 / 14324500 )] * 365

= 41.75 days

The lower the cash conversion cycle(CCC) the better. It means that the company can convert cash in hand into much more cash very quickly thereby increasing the firm's profitability. A negative CCC is more desirable. It means that the firm does not pay for raw materials until the final product is sold. The firm's working capital is used efficiently and the cash can be used for other activities.

Thus WalMart has a better CCC as it is negative.

If WalMart introduced a credit facility and customers would take an average of 30 days to pay, WalMart's days sales outstanding would increase by 30 days.

Therefore we add 30 to Walmart's CCC = -12.93 + 30 = 17.07 days

We see that the CCC of WalMart is still better than Dollar Tree Inc.