ity of a company portrays how quickly a company can convert its assets to cash. A firm’s liquidity is important to all users of financial statements because it indicates whether a firm can meet its short-term obligations. For the Walgreen's case, we analyzed the ratios of Inventory Turnover and Current Ratio.Inventory TurnoverInventory turnover is another instrument used to measure the liquidity of the company’s inventory. It is calculated by dividing the cost of goods sold by the average inventory. Inventory Turnover = Cost of Goods Sold Average InventoryInventory turnover is stated as the number of times per year a company turns over its inventory. Charles Gibson states that the figures can be misleading when using the beginning and ending inventory for the computation of the average inventory especially if the firm follows a natural business year or faces seasonal fluctuations. The problem, however, can be corrected if monthly balances of inventory are used. (Gibson 1998) For the calculation of this ratio, beginning and ending inventory figures were used. The following graph shows the inventory turnover for the four companies we analyzed. Figure 1 - Inventory TurnoverAs noted in the bar graph, Walgreens is leading in this category throughout the four years when compared to the other retail drugstores; CVS and Rite Aid. The inventory turnover for drugstore.com was much higher due to their central fulfillment facility. This gives drugstore.com the ability to carry lower inventory levels and demand just-in-time delivery from their suppliers to meet their demands for prescriptions. Current RatioThe current ratio is another instrument that measures the ability of a firm to pay its short-term debt. It is calculated by dividing the current assets by the current liabilities. Current Ratio = Current Assets Current LiabilitiesThe current ratio, unlike the working capital ratio, all...
