To address HP's quick ratio liquidity issue, we recommend that they lower their liabilities and increase their receivables. More directly, HP needs to increase their sales and decrease their expenditures. Increasing sales is easier said than done; however, Gateway is attempting to do so by utilizing and offering new complimentary technologies and enhancing their product lines through marketing strategies to increase their sales. Perhaps HP can implement a similar solution to increase sales. To address liabilities, we suggest HP focus on decreasing expenditures. By decreasing senior management bonuses to a proportionate figure based on profits, and by streamlining operations to be lean and more effective, HP can adjust liquidity ratios. We believe that if HP adopts this course of action, it will eventually produce a 1:1 ratio of liquidity over a reasonable period of time.
The interval measures ratio tells how many days a company can pay its bills, without selling any product, simply by using only its cash and other liquid assets.
Figure 3: Interval Measure in Days Ratio
Our analysis shows that Gateway approaches a year with 283 days compared to the industry standard of 45 days. This discrepancy is quite significant and can be attributed to their ready cash reserve of $730 million, which is almost double that of the other firms. Upon looking at the five-year trend, Gateway's interval measure has steadily declined. In addition, Dell and HP are well above the industry average coming in at 76 days and 73 days respectively and their trend lines are much more consistent with each other, nearly in parallel. In general, we believe that all three companies should continue their methodology and maintain their current interval measures ratio.
Efficiency ratios examine how productively the firm uses its assets. In other words, it shows how close a company is working to capacity (Brealey, 141).
