CASE JUST FOR FEET CHAPTER 2

Question no. 1 Why did the current ratio go up and the quick ratio go
down?
Answer
Part 1 Current Ratio
Current Ratio = Current Assets / Current Liabilities
For JUST FOR FEET, in 1998, current ratio = 3111167/155706 = 2
In 1999, current ratio = 449490/132692 = 3.39
We can see that current ratio has gone up and increased.
If we review the JUST FOR FEETs balance, then we can see that cash & equivalents decrease a
lot, A/R slightly increase, Merchandise Inventory increases almost double, other current assets
increase. On the other hand, A/p increased, Short term borrowing comes to zero, Accrued
expenses increased.
The main reason why current ratio increased is that short term borrowing comes to zero in 1999
from $90667 which was in 1998. Also, merchandise inventory has increased a lot almost double.
Effective current asset management is going on as JUST FOR FEET using more accounts
payable or spontaneous financing from suppliers & operation.
Part 2 Quick Ratio
Quick Ratio = (Current Asset Inventory)/ Current Liabilities
For JUST FOR FEET, in 1998, quick ratio = (3111167-206128)/155706 = .67
In 1999, quick ratio = (449490-399901)/132692 = .37
Quick ratio has gone down.

Quick ratio .37 means JUST FOR FEET has .37 0f cash, receivables & other current assets
excluding inventory, covering 1 dollar of current liabilities.
The main reason why quick ratio went down would be that merchandise inventory goes double
but cash & equivalents gone down like 7 times than previous years. Also, very little increase in
other current assets and A/R.

Question no. 2 Discuss the working capital cycle position of the company?
Answer:
Net Working Capital
Net Working Capital = Current Asset Current Liabilities
For JUST FOR FEET, in 1998, NWC = 3111167-155706 = 155461
In 1999, NWC = 449490-132692 = 316798
We can see that NWC has increased and positive.
NWC positive means in 1999, $316798 of long term funds has used to finance the current assets.
Usually, Larger the firms Assets, greater the NWC. We can see that the total assets of JUST
FOR FEET have increased significantly.
Traditionally, we can say that JUST FOR FEET is more solvent as it has greater current assets
relative to the level of current liabilities.
Net Liquid Balance
Net Liquid Balance = Cash& Equivalents (Notes payable + Current Maturities of Long
term Debt)
For JUST FOR FEET, in 1998, NLB = 82490-(90667+3222) = -11399
In 1999, NLB = 12412-(0+6639) = 5773
NLB is a measure of liquidity than solvency.

We can see that JUST FOR FEET has positive NLB which means greater the amount of liquid
resources to finance its working capital requirements.
It can also say that JUST FOR FEET has increased financial flexibility through positive NLB.
NLB results from financial decision or policies.
Working Capital Requirements
Working Capital Requirements = (A/R + Inventory + Other Current Assets) (A/P +
Accruals + others current Liabilities)
For JUST FOR FEET, in 1998, WCR = (15840+206128+6709)-(51162+9292+1363) = 166860
In 1999, WCR = (18875+399901+18302)-(100322+24829+902) = 311025
The accounts in WCR represent spontaneous sources of funds over the firms operating cycle.
Moreover, WCR is an index of working capital needs and very useful than traditional NWC.
Usually, WCR expand as sales expand (increase A/R and Inventory).
We can see that WCR is expanding.
If the increase in WCR is permanent because of a new higher level of operation, then it should be
finance with a permanent source of funds to maintain liquidity.
The Relationship between NWC, NLB and WCR
NWC = NLB + WCR
For JUST FOR FEET, in 1998, 155461 = (-11399) + 166860
In 1999, 316798 = 5773 + 311025
Working Capital Requirements to Sales Ratio
Working Capital Requirements to Sales Ratio = WCR/Sales
For JUST FOR FEET, in 1998, WCR to sales ratio = 166860/774863 = .22

In 1999, WCR to sales ratio = 311025/478368 = .65

WCR to Sales Ratio has increased.
If other factor being constant, the greater this ratio, the greater the company will have on external
funds given a change in sales.
We can see that Long term obligation of JUST FOR FEET have increased a lot.
As we can see that WCR to sales ratio is positive, it means a negative impact on liquidity and
firms cash cycle has not yet become a permanent source of financing. Also, more funds are not
available in payables and accruals than it requires for its A/r and inventory needs.

Question 3 Discuss the ability of the company to pay its current obligations?
Answer Liquidity has three ingredients time, amount and cost
A firm is considered to be liquid if it has enough financial resources to cover its financial
obligations in a timely manner with minimal cost.
Traditional ratio analysis seems to a weak tool for monitoring liquidity.
Important Liquidity measures are Cash Flow from Operation
For JUST FOR FEET, in 1998, Cash Flow From Operation = -26384
In 1999, Cash Flow From Operation = -82070
We can see that deficit in operating cash flow has increased than previous year.
Deficit in operating cash flow forces JUST FOR FEET to delay investment in fixed assets or to
obtain external funds.
If JUST FOR FEET continues like this for several years, then there may be a possibility of
bankruptcy which is a bad sign.

Cash Conversion Efficiency

Cash conversion efficiency = Cash Flow From Operation/Sales
It shows the firms ability to convert sales into cash flow from operations.
1998

1999

Cash Flow From Operation

-26384

-82070

Sales

478368

774863

Operating Profit

34296

51245

Net Profit

21403

26648

Operating Profit Margin

7.17%

6.61%

Net Profit Margin

4.47%

3.44%

Cash Conversion Efficiency

-5.51%

-10.59%

We can see from the table that operating profit margin and net profit margin of JUST FOR FEET
has dropped. Also, Cash conversion efficiency has decreased which indicates the low degree of
efficiency of a firms financial supply chain including cost efficiency and the management of
A/R, payables and inventory.
Cash Conversion period
Operating cycle = Days Sales Outstanding + Days Inventory Held
Cash Conversion Period = Operating Cycle Days Payable Outstanding

Days Inventory Held = Ending Inventory /Average Daily COGS

For JUST FOR FEET, in 1998, DIH = 206128 / (279816/365) = 268.88 Days
In 1999, DIH = 399901 / (452330/365) = 322.6 Days

We can see that slower turnover in inventory which indicates decreased efficiency and decrease
in cash flow.
Days Sales Outstanding = Ending A/R / (Sales/365)
For JUST FOR FEET, in 1998, DSO = 15840 / (478368/365) = 12 Days
In 1999, DSO = 18875 / (774863/365) = 8.9 Days
We can see that quick turnover in A/R which indicates increased efficiency and enhanced cash
flow.
Days Payables Outstanding = Ending A/P / (COGS/365)
For JUST FOR FEET, in 1998, DPO = 51162 / (279816/365) = 66.7 Days
In 1999, DPO = 100322 / (452330/365) = 80 Days
We can see that DPO increases which means slower turnover in the liability accounts which
improve the cash cycle

Operating cycle = Days Sales Outstanding + Days Inventory Held

For JUST FOR FEET, in 1998, Operating Cycle = 12 + 268.88 = 281 Days
In 1999, Operating Cycle = 8.9 + 322.6 = 332 Days

Cash Conversion Period = Operating Cycle Days Payable Outstanding

For JUST FOR FEET, in 1998, Cash Conversion Period = 281 66.7 = 214 Days
In 1999, Cash Conversion Period = 332 - 80 = 252 Days
Cash conversion period is a period measure of the elapsed time between the firms payment for
inventories and its customer payment for finished products. For JUST FOR FEET, cash
conversion period has increased by 38 days which means greater financial strain and less liquid.

Comments on liquidity position of JUST FOR FEET

From the calculation of cash flow from operation, Cash conversion efficiency and Cash
conversion period, we found that JUST FOR FEET is less liquid, low degree of efficiency in
managing supply chain, deficit in operating cash flows. So we can say that JUST FOR FEETs
ability has decreased to pay its current obligation.

Question 4 Compare and contrast the solvency position of the company with
its liquidity position?
Answer
A firm is solvent when its assets exceed its total liabilities. On the other hand, a firm is liquid
when it can pay its bills on time without undue cost.
The solvency position of JUST FOR FEET is strong and more solvent because current ratio has
increased, Net Working Capital has increased.
Also, we have seen that JUST FOR FEET needs more external fund as WCR and WCR to Sales
Ratio has increased. So current year we found that long term obligation of JUST FOR FEET has
increased and it has more funds available.
On other hand, JUST FOR FEETs liquidity position has become weaker as a result of deficit in
cash flow from operation, decrease in cash conversion efficiency and increase in cash conversion
period.
Another measure is useful that Current Liquidity Index which combine the stock of liquid assets
and the flow of cash through the cash cycle.
Current Liquidity Index (t) = [Cash Assets (t-1) + Cash Flow From Operation (t)]/ [Notes
payable (t-1) + Current Maturing Debt (t-1)]
For JUST FOR FEET, Current Liquidity INDEX in 1999 = (82490 + ( 82070))/(90667+3222)
=4.47 *10(3) (calculation in calculator shows this result) which means JUST FOR FEET has
some short term bank debt obligation that must be repaid.

If this ratio decreases over time like this, then it signals potential liquidity problem.
So we found that even though JUST FOR FEET is solvent according to traditional measurement
but it is less liquid or its liquidity position is weak.

Question 4 Discuss the impact of the company growing faster than its
sustainable growth rate?
Answer
Sales growth of JUST FOR FEET is high but cash flow is affected adversely by the growth rate.
Rapid growth of JUST FOR FEET has put a strain on the liquidity of the company as it requires
large working capital requirements per dollar of sales.
Concept of sustainable growth provides a framework to test whether a firms growth objectives
are contributing to its liquidity problem.
If JUST FOR FEET grows faster than the sustainable rate, it must has to support that growth
through cash generated from investing and financing activities. For example, selling fixed
assets, acquiring new debt in excess of the desired debt ratio, selling additional equity shares etc.
If JUST FOR FEET has the ability to grow at a faster than its sustainable growth rate and
management desires to achieve that higher rate of growth, then management should formulate a
new set of financial policies that will guide the sustainable growth rate toward the desired growth
rate.
Creditors may impose external restriction on an operation in the form of financial covenants in
loan contracts and shareholder may place a high value on payments of dividends. On form of
restriction can be target values for various ratios which are in the following
Sales to total Asset ratio = Sales/ Total Asset
For JUST FOR FEET, in 1998, Sales to Total Asset Ratio = 478638/448352 = 1.06
In 1999, Sales to Total Asset Ratio = 774863/689396 = 1.12
Debt to Equity Ratio = Total Debt / Total Equity

For JUST FOR FEET, in 1998, Debt to Equity Ratio = 180268/269084 = .67
In 1999, Debt to Equity Ratio = 363690/325706 = 1.12

Question 5 What conclusion might you draw about the liquidity

management of the company and its future?
Answer
The liquidity management of JUST FOR FEET is very weak because it has deficit in cash flow
from operation, its cash conversion efficiency has decreased than previous year which indicates
low degree of efficiency in supply chain, cost, A/R, inventories, payables management , its cash
conversion period has increased than previous year which is bad sign because even though Days
Sales Outstanding has decreased and Days Payables Outstanding Increased which is a positive
sign of liquidity management but Days inventory held increased significantly and thats why
cash conversion period increased. Also, Current Liquidity Index shows its short term debt will
mature which will effect in liquidity.
Moreover, increase in WCR and WCR to sales ratio indicates that JUST FOR FEET depends on
external funds more than it depends on spontaneous financing of payables and accruals.
To conclude, we want to say that JUST FOR FEET should not continue to grow rapidly at the
expense of liquidity and profitability. JUST FOR FEET is growing too faster, inventories are
ballooning, cash reserves are lowering etc. For example, same things once happened to DELL
and its share price once went down from $49 to $16 per share. So JUST FOR FEET very careful
and have to form golden triangle by balancing the key three key variables of growth, profitability
& liquidity.