As mentioned earlier, liquidity ratio measures how easily the firm can turn assets into cash. These ratios deal with changes in the working capital strategy for cash and marketable securities. The specific liquidity ratios in question include net working capital to total assets ratio, the quick ratio, and the interval measure ratio. The net working capital to assets ratio zeros in on how much each company has in capital reserves. Research indicates that both HP and Gateway have twice as much as the standard industry average of 0.12 whereas Dell is below the industry average, as shown in Figure 1.
In the five-year trend, we see that Dell's net working capital ratio sporadically declined. In order to raise Dell's numbers from .03 to meet the industry standards, Dell may need to strategically adjust their numbers with an infusion of cash in order to increase their capital on reserve. This may be important, because of their cash cycle requirements. Extra cash on hand may enable better performance from Dell. We recommend Dell increase their net working capital through better cash forecasting. This can be adjusted in the short-term through the use of short-term loans. However, their cash budget needs a long-term adjustment by increasing their long-term loans to better meet their current business level.
There are two options for Gateway and HP. Either of the companies can maintain the status quo with ready cash, or the companies can increase the amount of their investments in their working capital. The latter is less favorable with the current economic picture in mind. Having extra cash on hand is more prudent than trying to gain financially from investing the cash in other ventures, with riskier and less favorable returns in our current economy.
