Cummins Inc. (NYSE:CMI)

The financial data reveals several notable trends in operational efficiency and liquidity management over the five-year period.

Inventory Turnover

The inventory turnover ratio exhibited a declining trend from 5.05 in 2019 down to 3.81 in 2022, indicating slower inventory movement during these years. However, a recovery to 4.55 in 2023 suggests improvements in inventory management or sales velocity.

Receivables Turnover

Receivables turnover decreased notably from 6.42 in 2019 to a low of 5.19 in 2020, likely reflecting challenges in collecting receivables. The ratio rebounded to 6.1 by 2023, signifying improved efficiency in receivables collection.

Payables Turnover

This ratio declined sharply from 6.94 in 2019 to 5.02 in 2022, suggesting a lengthening in the payment cycle to suppliers. It increased again to 6.06 in 2023, indicating a return toward quicker payments or better supplier negotiations.

Working Capital Turnover

There was a pronounced fluctuation in working capital turnover, falling drastically from 7.54 in 2019 to 3.56 in 2020. However, by 2023, the turnover surged impressively to 14.84, which suggests significantly enhanced efficiency in using working capital to generate sales.

Average Inventory Processing Period

The average number of days inventory was held showed a steady increase from 72 days in 2019 to a peak of 96 days in 2022, reflecting slower inventory turnover or accumulation. By 2023, the period reduced to 80 days, demonstrating improved inventory management.

Average Receivable Collection Period

The days sales outstanding increased from 57 days in 2019 up to 70 days in 2020, indicating slower collections during that year. This period generally decreased thereafter, reaching 60 days in 2023, signaling improved control over receivables.

Operating Cycle

The operating cycle lengthened from 129 days in 2019 to 164 days in 2022, which may have put strain on the company’s cash flow. The cycle shortened to 140 days in 2023, indicating a positive development in converting inventory and receivables to cash.

Average Payables Payment Period

The payment period to suppliers extended from 53 days in 2019 to 73 days in 2022, suggesting longer payment terms or delayed payments. This period shortened back to 60 days in 2023.

Cash Conversion Cycle

The cash conversion cycle saw a gradual increase from 76 days in 2019 to 91 days in 2022, implying that the interval between cash outlay and cash collection lengthened. In 2023, this cycle improved, decreasing to 80 days, indicating enhanced liquidity management.

Overall, the data indicates that the company faced operational challenges during 2020-2022, evidenced by deteriorating turnover ratios and longer operating and cash conversion cycles. The year 2023 marks a significant turnaround with improved efficiency in inventory management, receivables collection, payables payment, and working capital utilization. This suggests that initiatives to optimize working capital and operational processes were effective in enhancing liquidity and operational performance.

Cost of Sales

The cost of sales exhibited a fluctuating trend over the five-year period. From 2019 to 2020, there was a notable decrease from 17,591 million USD to 14,917 million USD, reflecting a contraction possibly due to reduced sales volume or cost-saving measures. However, subsequent years showed a consistent increase, rising to 18,326 million USD in 2021, 21,355 million USD in 2022, and further to 25,816 million USD in 2023, suggesting expansion in production or sales activity and possibly inflationary impacts or increased input costs.

Inventories

Inventories presented a generally upward trend throughout the period. The value slightly decreased from 3,486 million USD in 2019 to 3,425 million USD in 2020, likely reflecting inventory adjustments during that year. From 2021 onwards, a strong growth pattern emerged, with inventories increasing substantially to 4,355 million USD in 2021, then to 5,603 million USD in 2022, and marginally to 5,677 million USD in 2023. This overall rise may indicate stockpiling strategies, anticipated demand growth, or potential supply chain changes.

Inventory Turnover

The inventory turnover ratio demonstrated a declining trend from 2019 through 2022, moving from 5.05 in 2019 down to 3.81 in 2022. This decline suggests a slower movement of inventory relative to sales, which may signal inefficiencies in inventory management or shifts in sales dynamics. In 2023, the ratio rebounded to 4.55, indicating an improvement in inventory utilization and possibly better alignment between sales and inventory holding levels. Overall, the changes in turnover ratio reflect volatility in how efficiently inventory is converted into sales during the examined period.

Net Sales

Net sales exhibited a fluctuating yet overall upward trend during the period analyzed. Starting at $23,571 million in 2019, net sales declined to $19,811 million in 2020, likely reflecting external market challenges experienced during that year. From 2020 onwards, there was a consistent recovery and growth, with sales rising to $24,021 million in 2021, $28,074 million in 2022, and reaching $34,065 million by the end of 2023. This represents a significant rebound and expansion, with the 2023 figure surpassing the 2019 baseline by a considerable margin.

Accounts and Notes Receivable, Net

The net accounts and notes receivable showed a steady increase throughout the years. Beginning at $3,670 million in 2019, this figure rose modestly to $3,820 million in 2020, then continued an upward trajectory to $3,990 million in 2021. The growth accelerated in 2022 and 2023, with the amount increasing to $5,202 million and $5,583 million respectively. The increasing receivables indicate a corresponding expansion in credit sales or extended credit terms during the later years, in line with growing sales volumes.

Receivables Turnover

The receivables turnover ratio experienced fluctuations over the reporting periods. It started at 6.42 in 2019, decreasing to 5.19 in 2020, which suggests slower collection of receivables that year. In 2021, the ratio improved to 6.02, indicating enhanced efficiency in accounts receivable management. However, the turnover dipped again in 2022 to 5.4, before recovering to 6.1 in 2023. These fluctuations reflect varying collection speeds, with the most recent ratio close to the initial level, indicating stabilization in receivables management efficiency.

The analysis of the provided financial data reveals notable trends in cost of sales, accounts payable, and payables turnover over the five-year period from 2019 to 2023.

Cost of Sales

There is a clear upward trend in the cost of sales, increasing consistently year over year. Beginning at $17,591 million in 2019, the figure decreased slightly in 2020 to $14,917 million, likely reflecting economic conditions impacting business activity. However, the cost swiftly rose thereafter to $18,326 million in 2021, continuing upward to $21,355 million in 2022, and reaching $25,816 million by the end of 2023. This represents a substantial overall increase from 2019 to 2023, indicating higher production or procurement costs and possibly growth in sales volume or raw material prices.

Accounts Payable

Accounts payable steadily increased throughout the period, moving from $2,534 million in 2019 to $2,820 million in 2020, then to $3,021 million in 2021. The increase became more pronounced in 2022, rising sharply to $4,252 million and slightly increasing to $4,260 million in 2023. The significant jump in 2022 suggests greater short-term liabilities, possibly reflecting higher purchasing activity or extended payment terms.

Payables Turnover Ratio

The payables turnover ratio illustrates fluctuations over the years. Starting at 6.94 in 2019, it declined to 5.29 in 2020, indicating slower payment to suppliers. The ratio improved somewhat to 6.07 in 2021 but fell again to 5.02 in 2022, the lowest level in the period, suggesting elongated payment periods or increasing accounts payable relative to cost of sales. The turnover rebounded to 6.06 in 2023, approaching the earlier levels seen in 2019 and 2021. Overall, the ratio's variability reflects changes in payment practices or supply chain conditions during these years.

The analysis of the financial data reveals significant fluctuations across the examined period.

Working Capital

Working capital showed an initial increase from 3,127 million US dollars in 2019 to a peak of 5,562 million in 2020. However, this was followed by a gradual decline over the next three years, falling to 2,295 million by the end of 2023. This decline suggests a reduction in current assets relative to current liabilities, impacting liquidity management.

Net Sales

Net sales exhibited a notable recovery and growth trend. After decreasing from 23,571 million US dollars in 2019 to 19,811 million in 2020, net sales rebounded strongly in subsequent years, reaching 34,065 million by 2023. This upward trend indicates a robust recovery and expansion in sales volume or price.

Working Capital Turnover

Working capital turnover, which measures the efficiency of using working capital to generate sales, initially decreased sharply from 7.54 in 2019 to 3.56 in 2020. This decline corresponds with the increase in working capital and dip in sales during the same period. Thereafter, the ratio improved significantly, rising to 14.84 by 2023, indicating enhanced efficiency in using working capital to support higher sales levels despite lower working capital amounts.

Overall, the data suggest that although the company faced liquidity challenges during the 2020 period, it managed to improve operational efficiency over the following years. The declining working capital alongside growing net sales and increasing working capital turnover ratio points to better management of current assets and liabilities to support higher sales without proportionate increases in working capital.

Inventory Turnover Ratio

The inventory turnover ratio demonstrates a declining trend from 5.05 in 2019 to a low of 3.81 in 2022. This indicates a progressive slowdown in inventory movement during this period. However, in 2023, there is a noticeable recovery to 4.55, suggesting an improvement in the rate at which inventory is sold and replaced.

Average Inventory Processing Period

The average inventory processing period shows an increasing trend from 72 days in 2019 to 96 days in 2022, reflecting that inventory is held longer before being processed or sold. A reduction to 80 days in 2023 signals a reduction in inventory holding time, aligning with the improved inventory turnover ratio observed in the same year.

Summary

Overall, the data reveals a period of declining efficiency in inventory management from 2019 through 2022, as evidenced by a reduced turnover ratio and an extended processing period. The reversal of these trends in 2023 suggests that measures undertaken to enhance inventory management have been effective, leading to faster inventory turnover and shorter holding periods compared to previous years.

Receivables Turnover

The receivables turnover ratio exhibits some fluctuations over the five-year period. It began at 6.42 in 2019, declined to 5.19 in 2020, suggesting a slower collection pace during that year. The ratio improved to 6.02 in 2021, indicating a quicker conversion of receivables to cash. However, it decreased again to 5.4 in 2022 before rising to 6.1 in 2023. Overall, the ratio shows variability, with the highest turnover occurring in 2019 and the lowest in 2020, followed by a recovery trend in subsequent years.

Average Receivable Collection Period

The average collection period, expressed in days, generally follows the inverse trend of the receivables turnover. The period increased from 57 days in 2019 to a peak of 70 days in 2020, indicating that it took longer to collect receivables during that year. The collection period then shortened to 61 days in 2021 but extended again slightly to 68 days in 2022. By 2023, the period decreased to 60 days, demonstrating a trend towards improved collection efficiency in the most recent year. These fluctuations highlight varying efficiencies in managing receivables, with 2020 being the year with the most extended collection duration.

Summary of Trends

The data reflects a noticeable impact in 2020, where receivables turnover decreased and the collection period lengthened, possibly indicative of external pressures or operational challenges during that period. Subsequent years show improvement in both metrics, suggesting enhanced receivables management and collection processes. Nonetheless, the ratios have not consistently returned to the levels seen in 2019, with some variability persisting through 2022 and 2023. The overall pattern signals a recovery trajectory with ongoing attention required to maintain and improve receivables efficiency.

Average Inventory Processing Period

The average inventory processing period exhibited an increasing trend from 72 days in 2019 to a peak of 96 days in 2022, indicating a lengthening of the time inventory is held before being sold. In 2023, this period decreased to 80 days, suggesting an improvement in inventory turnover compared to the previous year but still remaining higher than the levels in 2019 through 2021.

Average Receivable Collection Period

The average receivable collection period showed variability over the five-year span. Starting at 57 days in 2019, it increased to 70 days in 2020, decreased to 61 days in 2021, rose again to 68 days in 2022, and reduced to 60 days in 2023. Overall, the collection period in 2023 is slightly elevated compared to 2019 but demonstrates some improvement relative to the peak in 2020 and 2022.

Operating Cycle

The operating cycle, which combines the inventory processing and receivables collection periods, generally lengthened from 129 days in 2019 to 164 days in 2022. This growth indicates an overall extension in the time taken from inventory acquisition through to cash collection from customers. In 2023, the operating cycle improved to 140 days, reflecting enhanced efficiency compared to 2022 but still longer than the cycle duration at the beginning of the period under review.

In summary, the data reflects increasing operational durations through 2022, with partial reversals in 2023. The lengthened inventory processing periods and collection times during 2020 through 2022 could point to supply chain or sales collection challenges. The improvements seen in 2023 suggest efforts to optimize inventory management and receivables collection have had a beneficial impact, resulting in a shorter operating cycle relative to the previous year.

Payables Turnover

The payables turnover ratio exhibited fluctuations over the five-year period. It started at 6.94 in 2019, then declined to a low of 5.02 in 2022 before recovering to 6.06 in 2023. This suggests variations in the company's efficiency in paying its suppliers, with a general dip in turnover efficiency around 2020 through 2022, followed by a partial rebound in the most recent year.

Average Payables Payment Period

The average payment period for payables displayed an inverse pattern relative to the payables turnover ratio. It increased from 53 days in 2019 to a peak of 73 days in 2022, indicating a lengthening in the time taken to settle supplier obligations. By 2023, the period shortened to 60 days. This pattern indicates that while the company extended its payment terms or delayed payments during the 2020-2022 period, it shortened this duration somewhat in 2023, moving closer to earlier payment practices.

Overall Insights

The trends observed in the payables turnover and payment period suggest that the company adjusted its payment strategy over time, possibly in response to changing cash flow needs or supplier negotiations. The elongation of the payment period during the middle years may reflect an effort to conserve cash, whereas the improvement in turnover ratio and reduction in days payable in 2023 indicate a shift back towards more prompt payment behaviors.

Average inventory processing period

The average inventory processing period showed an overall increasing trend from 72 days in 2019 to a peak of 96 days in 2022, indicating a lengthening of the time inventory remains in stock. However, in 2023, this period decreased to 80 days, suggesting an improvement in inventory turnover or management efficiency.

Average receivable collection period

The receivables collection period fluctuated over the years. It increased from 57 days in 2019 to 70 days in 2020, then decreased to 61 days in 2021. This was followed by a rise to 68 days in 2022 and a subsequent decrease to 60 days in 2023. This pattern indicates some volatility in the company's efficiency in collecting payments from customers, with no consistent trend toward improvement or deterioration.

Average payables payment period

The payables payment period exhibited notable variability. It increased significantly from 53 days in 2019 to 69 days in 2020, decreased to 60 days in 2021, rose again to 73 days in 2022, and then dropped to 60 days in 2023. This suggests fluctuating payment practices, with periods of extended payment terms followed by reduced payment durations.

Cash conversion cycle

The cash conversion cycle generally increased from 76 days in 2019 to 91 days in 2022, indicating a longer duration between outlay of cash and cash recovery. However, in 2023, it shortened to 80 days, reflecting a moderate improvement in overall working capital efficiency.

Summary of trends

The data reveals that the company experienced increases in inventory holding and cash conversion cycle durations until 2022, which may have put pressure on liquidity. The declines in 2023 across inventory processing period and cash conversion cycle suggest efforts to enhance operational efficiency. Receivables and payables periods exhibited fluctuations without a clear directional trend, indicating variable management of credit and payment practices. Overall, the 2023 figures suggest a tilt toward improved working capital management after a few years of extended cycles.