The quick ratio is another form of liquidity analysis. It measures how liquid a firm is. Companies, in general, who maintain or exceed a one to one ratio of liquidity, are considered sufficiently liquid. Figure 2 will aid in our analysis.
Our research of the three companies reveals that Dell's quick ratio had been above average until just recently when it dropped drastically, most likely due to the poor economy. Between 1995 and 1998, the market reached a saturation point. It appears that Dell realized this market saturation trend was occurring and reacted faster than any of its competitors. As such, Dell efficiently adjusted their business, which aided with their overall liquidity.
With further research, we find that HP is not liquid enough. This means that HP is potentially very cash strapped during their cycle of operations. In 1997, HP had a quick ratio of 0.95, or close to the 1:1 ratio of liquidity. Over the five-year trend, their quick ratio has dropped consistently to the present level of 0.63. HP's predicament may reflect the overall slump in the computer industry, from a time of high investment and growth in the mid- to late- 1990's until now. Consequently, HP's current liquidity ratio of .63 is nearly 40% less than it was five years ago when the industry average was at 1.0.
Gateway on the other hand, went at establishing itself as a very liquid company. This alone does not mean it is financially strong; especially considering Gateway's liquidity comes from a very high cash reserve rather than from operations. In addition, this high cash reserve skews the ratio analysis, and we find it interesting to note that too high of liquidity shows that money is not being invested most effectively.
Having identified HP as the most problematic in the area of liquidity ratios, we will now offer possible solutions.
