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Snowballing Debt Or Valuable Investment? Essay

1687 words - 7 pages

Entities, despite profitability level, may become bankrupt if it cannot cover obligations with short-term creditors. Liquidity ratios can be calculated from a company’s financial statements to determine their ability to meet short-term credit responsibilities. In most cases, the higher the resulting ratio, the more apt the firm is to pay their duties to creditors in the short-run (Gibson, 2011, p. 210.
Vail Resorts days’ sales in receivables was 22.5 in 2010, compared with 21.7 days in the 2009 fiscal year (MSN Money, 2011). This suggests that the number of average days it requires to collect receivables has consistently risen, conveying a negative trend in the degree of control over credit collection. Most significantly, the number of days a debt is outstanding for fiscal year 2010 has increased by 47% since 2008. However, the extraordinarily high ratio results may not be a particularly reliable measure of liquidity due to the largely seasonal operating nature of the ski resort.
The accounts receivable turnover ratio uses net sales and average gross receivable figures to produce a result more indicative of their liquidity. The turnover in 2008 was 24.58 times per year. 2009, according to MSN Money (2011), resulted in a turnover of 18.05 times annually. Credit accounts were reconciled 15.56 times per year in 2010. The negative trend appears to have dissipated when looking into 2011’s fiscal quarters; the most recent calculations show a turnover of 28.83 times (Morningstar, 2011).
The primary asset used to gauge the ability to repay short-term debt is inventory, accounting for 28 percent of Vail Resorts’ current assets in 2010. For that year, it would have taken 25.57 days to use up inventory levels based on sales figures. 2009 resulted in duration of 23.61 days. This increase of 16.65% over 2008’s 20.24 days suggests that the company had better inventory practices in the years prior to 2010. The seasonality of the business, though, could produce an unrealistic number of days.
Management must utilize analysis of prior years’ quarterly sales figures to determine the best inventory procedures for a business that sees a sharp influx of customers in winter. Additions of summer activities at selected Vail Resorts is a tactic used by executives in hopes to bring steadier off-season sales (“MTN Q4 2010 Earnings Call”, 2010). The ability to liquidate inventory is paramount to fulfilling obligations of short-term debt. Inventory turnover ratios for the firm were 18.03 times in 2008, 15.46 times in 2009, and 14.28 times in 2010, respectively.
Currently, inventory turnover has increased by 38% giving 2011 a ratio of 21.4 times thus far. The company, however, is still well below the industry average of 81.9 signifying that there is necessity for strategies that move annual inventory faster. At the end of 2008, the current ratio was .98, and decreased by 7.14% at the end of 2009 (.91). The 2010 fiscal year disclosed a current ratio, or short-term...

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