The Current Ratio in the Footwear Industry

The current ratio is a financial metric that measures a company’s ability to pay short-term debt with its most liquid assets. It can vary greatly from industry to industry, so it’s important to benchmark against your peers.

Phoenix Footwear Group, Inc. operates as a footwear retailer and wholesaler. The Company offers branded and private-label footwear products.

1. Determining the Industry Average

The current ratio varies significantly across industries, reflecting the different operational and financial structures inherent in each sector. Therefore, it’s important to determine the industry average when benchmarking a company’s current ratio. By comparing against the industry average, companies can identify potential areas for cost savings and improve their competitive positioning.

For example, a shoe manufacturer that operates in the retail industry may have a higher current ratio than a company operating in the manufacturing industry because of the difference in inventory management practices. Similarly, companies operating in different regions or countries may also experience differences in current ratios due to regional or economic factors.

Fortunately, there are several ways to determine the industry average, including using publicly available data and conducting a custom benchmarking report. In addition, it’s important to monitor the industry average regularly so that you can identify trends and changes in the marketplace. This will help you make better decisions about your business’s future. For example, if the industry average has been declining for several years, this could be an indication that the market is experiencing difficulties that could impact your business.

2. Calculating the Current Ratio

The current ratio measures a company’s ability to pay off its short-term debts and liabilities with its most liquid assets. It’s calculated by dividing current assets by current liabilities. Current assets include inventory, accounts receivable, and cash and cash equivalents. Current liabilities include accounts payable and short-term notes payable.

Using the current ratio alone, however, can be misleading. Liquidity analysis is more productive when it’s complemented by other similar liquidity metrics. For example, the days sales outstanding metric helps analysts understand how long it takes for a company to collect payments from its credit sales, which could have a hidden impact on the company’s current ratio.

It’s also important to examine how a company’s current ratio has changed over time. A declining current ratio may indicate financial problems, while an improving one may signal a successful business strategy.

The current ratio is only a snapshot of a company’s liquidity and doesn’t account for the quality of its inventory or the timing of its cash flow. Therefore, it’s important to use other indicators as a supplement when analyzing a footwear company.

3. Determining the Company’s Current Ratio

The current ratio is a liquidity measure that evaluates a company’s ability to pay short-term liabilities with its existing assets. It measures the amount of current assets (cash and other short-term assets that can be converted to cash within one year) divided by a company’s current liabilities. The higher the current ratio, the more capable the company is of paying its debts.

Acceptable current ratio values vary by industry, but they are typically between 1 and 3. A lower current ratio indicates that a company may be at risk of going bankrupt, or at least facing difficulty paying its debts as they come due in the near future.

A company’s current ratio can be influenced by many factors, including the length of time it takes for a business to collect payments from its customers and how well it manages its inventory. Therefore, it is important to look at other liquidation metrics, such as days sales outstanding and net profit margin, to gain a complete picture of a company’s financial health.

To determine a footwear company’s current ratio, calculate the total of a firm’s current assets minus its current liabilities and divide by the industry average. This metric is used by investors, creditors, and suppliers to assess the viability of footwear companies’ business operations and their ability to generate revenue with the resources they have available.

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