Textron Case Analysis

Textron Case

Textron Case

9/26/2011

9/26/2011

In order to assess the company’s financial performance, one should calculate several sets of ratios. When focusing on the activity ratios, one should notice that the receivable collection period was shorter in 2006 than in 2005 and 2004. This improvement meant that the company could turn their receivables into cash faster, reducing the risk of showing a loss on bad debts. The company had an increasingly longer inventory collection period and a payable payment period in 2005 and 2006, which meant that Textron had trouble in dealing with their inventories and payables. This might be due to the fact that the Bell segment and Cessna segment, the two subsidiaries of Textron that manufactured helicopters and general aviation aircrafts, together accounted for over 50% of the company’s revenue. Textron needed more time to sell its products in order to turn their inventories into cash. Consequently, company should pay more attention to this in the future because it will receive higher profits with a shorter inventory collection period. (See Ratios)

When looking at liquidity ratios, the company’s asset turnover ratio for 2006 was lower than that of 2005; however it was still greater than 1 which means that Textron was able to take advantage of its total assets more efficiently. Textron was also still able to pay for its liabilities in the short-term. From there we removed the influence of inventory and calculated the acid test ratio using those current assets with very good liquidity. The acid test ratio was 0.65, which was higher than that in 2005 and 2004. Our group personally feels that the acid test ratio was much fairer and more accurate when assessing the company’s financial performance. This is because global multi-industry companies, like Textron would take a longer period of time to turn their inventories into cash. (See Ratios)

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