Question

You are an investment analyst at Valley Insurance. Robert Jollie, a CFA and your superior, recently asked you to prepare a report on Gant Corporation’s liquidity. Gant is a manufacturer of heavy equipment for the agricultural, forestry, and mining industries. Most of its plant capacity is located in the United States, and a majority of its sales are international. Gant’s investment bankers are offering Valley Insurance a participation in a private placement debenture issue.
Beyond the traditional ratio analysis, your memo to Jollie stresses the following:
1. Gant’s current ratio is 2:1.
2. During the prior fiscal year, Gant’s working capital increased substantially.
3. While Gant’s earnings are below record levels, rigorous cost controls yield an acceptable level of profitability and provide a basis for continued liquidity.

After reviewing your memo, Jollie dismisses it as "totally inadequate"-not because it did not include a quantitative analysis of financial ratios, but because it did not effectively address liquidity. Jollie writes:
Liquidity is a cash issue, and liquidity analysis is a process of evaluating the risk of whether a company can pay its debts as they come due. The vagaries and inconsistencies of working capital definitions do not adequately address this issue. Working capital analysis simply accounts for the change in a company's working capital position and adds little to an assessment of liquidity.

Required:
a. Identify five key information items directly reflecting on Gant's liquidity that you should attempt to derive from this company's financial statements and management interviews.
b. Identify five qualitative financial and economic assessments specific to Gant and its industry that you should consider in further analyzing Gant's liquidity.
(CFA Adapted)



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  • CreatedJanuary 22, 2015
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