J.C. PENNEY COMPANY Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

J.C. PENNEY COMPANY Case Solution

Question 1

What do the liquidity ratios – Current, Quick, and Cash-to-Sales – reveal about JC Penney’s financial position for the eight quarters spanning Q1 2011 to Q4 2012?

The liquidity ratios for JC Penney have been computed as shown in the appendix for the eight quarters spanning from quarter 1 of the year 2011 to quarter 4 of the year 2012. First of all, if we look at the current ratio of the company, then it could be seen that the current ratio of the company has been consistently dropping over the past eight quarters. The current ratio for JC Penney in the first quarter of 2011 was 2.1 times. This ratio was near to an ideal ratio for a retailer in such a market. However, this ratio started falling since then and the current ratio in the fourth quarter of the year 2012 was 1.43 times. Although the current assets of the company are in excess of its current liabilities, however this is not an ideal ratio and the decreasing trend for this ratio is an alarming situation for JC Penney.

Secondly, if we analyze the trend of the quick ratio, which shows the percentage of the quick assets of the company over the current liabilities, then it could be seen that this ratio has also been declining continuously over the last eight quarters with a quick ratio of 0.83 times in the first quarter of 2011 falling to a quick ratio of 0.52 times in the fourth quarter of 2012. This is very risky and shows a poor working capital management of the company. This also shows that the cash position of the company is weak or the amount of those current assets which could not be converted quickly into cash is high.

Lastly, if we look at the cash to sales ratio for the company, then it could be observed that this ratio has also been following a declining trend but it had also observed slight ups and downs between first and the last quarter for the year 2012 but the overall decline in this ratio is significant. The cash to sales ratio for the first quarter of 2011 was 45% and currently it is 24%. This clearly shows that the company has issues in transforming its sales into cash and thus, the company is facing cash problems. Overall, all the three liquidity ratios show that the predictions of the industry analysts are correct and the liquidity position of the company is weak.

Question 2

What do the leverage ratios – Debt-to-Capital, Interest Coverage, and Cash-to-Debt – reveal about JC Penney’s financial position for the eight quarters spanning Q1 2011 to Q4 2012?

After performing an analysis for the liquidity ratios of JC Penney, the leverage ratios for the company have also been computed for the last eight quarters. First of all, if we look at the trend of the debt to capital ratio, then it could be seen that the capital structure of the company is strong as it has maintained a debt to capital ratio of about 33% to 36% on average for the last eight quarters as compared to the industry average of 30%, which is quite impressive. The current debt to capital ratio for the company is around 33% to 34% approximately.

Secondly, the interest coverage ratio for the company has been calculated and this is the ratio, which shows the most alarming situation faced by the company. The interest coverage ratio shows the ability of the company to pay interest on its outstanding debt. The interest coverage ratio for the company in the first quarter of 2011 was 2.77 times. This was a very low ratio for the company however, what is more worse is the negative interest cover ratio for the company of -13 times in the fourth quarter of 2012. This is a worse situation for the company since it has negative operating income, as a result the company would not be able to pay debt on its outstanding obligations....................

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