The current ratio of Dollar Tree Store Limited has slightly declined over time, but this demonstrates the company's focus on managing working capital. The current ratio indicates the ability to cover present liabilities with existing assets. Meanwhile, the acid test ratio, which measures the capability to pay off short-term debts using highly liquid assets, has improved over time. Therefore, it is likely that the decrease in working capital was primarily due to inventory reduction.
From 2005 to 2006, the corporation's capability to fulfill present liabilities improved. This was despite a decrease in inventory levels, as evidenced by an increase in the stock turn ratio. Management's stock control skills were more effective, resulting in an increase from 3.53 times to 3.
The fact that managers were able to dispose of stock seven times faster is a positive in
...dicator for Dollar Tree Store's liquidity. This means that less money is tied up in stock, which is beneficial for the organization because many companies face cash flow problems due to excessive stock levels. This is not the case for Dollar Tree Store, as they operate as a fixed price discount variety store.
Cash, cheques, and MasterCard/Visa credit cards are the primary methods of sales. The Balance Sheet reflects the low importance of trade receivables from debtors. Therefore, we did not calculate ratios on debtors collection period as it is insignificant. The current ratio of Dollar Tree Store decreased due to the reduction in cash and cash equivalents and inventories. However, the opening paragraph of this section highlighted an increase in the acid test ratio indicating a better ability to cover current liabilities. To investigate the reasons for the decrease
in cash and cash equivalents, we analyzed the cash flow statement of the firm.
By reflecting a 32.07% increase in net cash flow generated from operating activities, the positive managerial ability to create cash from Dollar Tree Store's operations is evident. Despite a significant reduction in cash and cash equivalents mainly due to the $169,731,000 redemption of stock, there remains a positive balance of $65,834,000 at the end of financial year 2006. As long as sound cash management practices are upheld by management, there should be no concerns over the company's current position with regards to its cash flow. In fact, improvements can be anticipated moving forward.
The decrease in Dollar Tree Store's financial position can be attributed to a change in their capital structure. The acid test ratio did increase, however, thanks to a reduction in short-term debt and other current liabilities, which offset the decline in cash and cash equivalents. These current liabilities include compensation benefits, taxes (excluding corporation tax), insurance, and other expenses. Despite these fluctuations, Dollar Tree Store's working capital position remains strong at $648,220,000 in net current assets.
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