Cummins Inc. (NYSE:CMI)

The analysis of the financial ratios over the reported quarters reveals notable trends related to the management of inventory, receivables, payables, and overall working capital efficiency.

Inventory Turnover

The inventory turnover ratio exhibits a decreasing trend from early 2020 through late 2022, declining from approximately 5.05 to a low of 3.60. This suggests that inventory was being sold or used more slowly during this period. From late 2022 onward, the ratio gradually improved, reaching 4.47 by the first quarter of 2024, indicating a recovery in inventory management efficiency.

Receivables Turnover

The receivables turnover ratio shows some fluctuations but remains within a range of roughly 4.96 to 6.44 from early 2020 through early 2024. It declined initially through mid-2021, suggesting slower collection of receivables during that time, but then improved steadily from late 2021 onwards, ending at 6.23. This indicates an overall improvement in the collection process and credit management in recent quarters.

Payables Turnover

The payables turnover ratio experienced a decline from 6.94 in early 2020 to a low of approximately 4.82 around mid-2020, indicating slower payment to suppliers. From mid-2020 onwards, the ratio generally improved, peaking near 6.07 by late 2021. Subsequently, the ratio stabilized in the mid-5 range, ending at 5.75 in the first quarter of 2024. This pattern may suggest a more balanced approach to managing payables in recent periods.

Working Capital Turnover

Working capital turnover presented significant volatility, decreasing sharply from a high of 8.04 in mid-2020 to a low of 3.56 by early 2021, implying reduced efficiency in generating sales from working capital. After that, it displayed a gradual upward trend, peaking dramatically at 14.84 in the first quarter of 2024 before settling back to 8.65. The sharp increase likely reflects very efficient use of working capital during certain periods, though the variation suggests fluctuations in operating conditions or capital management strategies.

Average Inventory Processing Period

This metric increased steadily from 72 days in early 2020 to a peak of 101 days by late 2022, indicating that inventory was held longer before being processed or sold. After reaching this peak, the period decreased to around 82 days by early 2024, suggesting improved inventory turnover speed recently.

Average Receivable Collection Period

The average number of days to collect receivables showed a rising trend from 57 days in early 2020 to about 74 days mid-2020, pointing to slower collections during this time. Following this, the collection period decreased gradually, ending at 59 days in early 2024, reflecting improved efficiency in receivables management.

Operating Cycle

The operating cycle lengthened from 129 days in early 2020 to a peak of 168 days by late 2022, indicating longer cash-to-cash cycles and possibly reduced operational efficiency. Subsequently, it shortened to approximately 141 days by the first quarter of 2024, suggesting operational improvements.

Average Payables Payment Period

The period to pay suppliers increased from 53 days in early 2020 to a peak of 76 days mid-2020, implying slower payments to creditors during this period. Afterward, it fluctuated around 60 to 74 days, ending near 63 days in early 2024, reflecting a consistent payment strategy over the last several quarters.

Cash Conversion Cycle

The cash conversion cycle increased from 76 days in early 2020 to a high of 95 days by late 2022, indicating that the company took longer to convert resource inputs into cash flows. Since then, it has decreased to 78 days by early 2024, suggesting improved liquidity management and operational efficiency.

In summary, the company's operational efficiency experienced some challenges between 2020 and 2022, with slower turnover of inventory and receivables, longer operating and cash conversion cycles, and variability in working capital turnover. However, from late 2022 into early 2024, there are clear signs of improvement across key metrics, reflecting enhanced management of inventory, receivables, payables, and working capital, leading to a more efficient operating cycle and cash flow conversion process.

Cost of Sales

The cost of sales exhibited a fluctuating pattern over the observed period. Initially, there was a decline from 4472 million US$ in March 2019 to 2962 million US$ in June 2020, reaching the lowest point in that timeframe. Following this trough, the cost of sales rose steadily, peaking at 6542 million US$ in December 2023 before slightly decreasing to 6362 million US$ in March 2024. Overall, after an initial downward trend, the cost of sales showed a significant recovery and gradual expansion toward the end of the period.

Inventories

Inventories showed relative stability in the early periods, fluctuating modestly between 3486 and 3896 million US$. From March 2021 onwards, inventories exhibited an upward trajectory, increasing from 3753 million US$ to a high of 6026 million US$ by September 2023, before decreasing modestly to 5758 million US$ in March 2024. This suggests a buildup of inventory over time, indicating either increased production or cautious stockpiling amid changing demand conditions.

Inventory Turnover Ratio

The inventory turnover ratio decreased from 5.05 in March 2020 to a low of 3.60 in September 2022, indicating a slowdown in the rate at which inventory was sold or used. After this point, the ratio began rising, reaching 4.55 in December 2023 and slightly declining to 4.47 by March 2024. This fluctuation reflects varying efficiency in inventory management, with a notable dip during the mid-period followed by an improvement towards the end.

Summary of Trends

Overall, the data indicates that after an initial drop in cost of sales and inventory turnover during early 2020, likely correlated with external disruptions, there was a sustained recovery and growth in cost of sales through late 2023. Inventories increased steadily during most of the periods, peaking in late 2023, which aligns with the lower inventory turnover ratios observed mid-period, suggesting greater inventory levels relative to sales. Towards the end of the period, improvements in inventory turnover ratio point to enhanced inventory management efficiency or increased sales velocity. These patterns reflect adaptive responses in operations and supply chain management over the analyzed timeframe.

The financial data reveals several notable trends across the periods observed. Net sales displayed considerable fluctuations with an overall upward trend commencing around early 2021. After experiencing a decline reaching a low point in June 2020, sales steadily increased, peaking in mid-2023 before showing a slight decline towards the first quarter of 2024. This pattern indicates a recovery and growth phase following a period of contraction.

Accounts and notes receivable, net, followed a somewhat similar profile but with less volatility. The amounts decreased steadily through to mid-2020, reflecting reduced sales or tighter credit management. Beginning in late 2020, receivables began to rise, peaking notably in late 2023, and slightly tapering off in the first quarter of 2024. This increase aligns with the recovery and growth observed in net sales, though the pace of growth in receivables appears more pronounced, which may affect liquidity considerations.

The receivables turnover ratio, which measures the efficiency of collection on outstanding credit sales, showed a declining trend from early 2019 through mid-2020, indicating slower collection of receivables. This ratio reached its minimum around mid-2020 before beginning a gradual recovery. From late 2021 onwards, the turnover ratio generally improved, with temporary fluctuations, suggesting an enhancement in collection efficiency as sales and receivables volumes grew.

Net Sales

Demonstrated a decline through mid-2020 followed by steady growth to a peak in mid-2023, then a mild reduction in early 2024.

Accounts and Notes Receivable, Net

Reflected a decline reaching a trough in mid-2020, afterwards increasing significantly through late 2023, with a slight decrease in early 2024.

Receivables Turnover Ratio

Declined until mid-2020, indicating slower collections, then exhibited a gradual improvement thereafter aligning with sales recovery.

Overall, the data suggests an initial period of contraction or stress, potentially linked to external economic factors, followed by a notable recovery phase in sales and receivables with improving collection efficiency. Continuous monitoring of receivables in relation to sales will be important to ensure optimal working capital management going forward.

The analysis of the quarterly financial measures reveals several notable trends in the period reviewed.

Cost of Sales

The cost of sales exhibited fluctuations throughout the quarters. Initially, there was a slight decline from $4,472 million in March 2019 to $4,265 million in December 2019, followed by a more pronounced decrease reaching a low of $2,962 million in June 2020. After this trough, the cost of sales increased notably, peaking at $6,360 million in December 2023 before slightly reducing to $6,362 million in March 2024. This pattern suggests a recovery and subsequent growth phase following a downturn, potentially attributable to external economic factors affecting production or procurement costs.

Accounts Payable, Principally Trade

The accounts payable figures reveal a generally upward trend with some intermediate fluctuations. Starting at $3,018 million in March 2019, the value dipped to $2,281 million in June 2020, mirroring the decline seen in cost of sales during the same period. From that point onward, accounts payable increased steadily, reaching $4,476 million by March 2024. The rising accounts payable aligns with increased cost of sales and could indicate higher purchase volumes or elongated payment terms.

Payables Turnover Ratio

The payables turnover ratio demonstrates volatility over the periods analyzed. In the early periods where data is provided, the ratio decreased from 6.94 in March 2020 to a low of 4.82 in June 2021, indicating a slower rate of paying suppliers relative to purchases. Thereafter, it showed variability but generally remained within a range of approximately 4.95 to 6.07. The ratio's movement may reflect changes in payment policies, supplier negotiations, or cash flow management strategies.

Overall, the cost of sales and accounts payable data illustrate a period marked by an initial contraction followed by a substantial increase, while the payables turnover ratio suggests adjustments in payment timing and supplier handling. These trends signify dynamic operational and financial management adapting to changing market or internal conditions.

The financial data reveals several notable trends in working capital, net sales, and working capital turnover over the analyzed quarters.

Working Capital

The working capital exhibited fluctuations throughout the periods. Initially, it decreased from 3,664 million USD at the end of March 2019 to 2,808 million USD by the end of March 2020. Subsequently, there was a significant increase peaking at 5,562 million USD at the end of December 2020. After this peak, the working capital generally trended downward with some volatility, reaching a low point of 2,295 million USD at the end of December 2023 before a recovery to 3,934 million USD by March 2024.

Net Sales

Net sales demonstrated variability with an overall upward trajectory across the periods. Sales began at 6,004 million USD in March 2019 and experienced a decline to 3,852 million USD by June 2020, likely impacted by external factors during that time. A recovery phase followed, with sales steadily increasing and reaching a peak of 8,638 million USD in September 2023. A slight decrease was observed in the last two quarters, ending at 8,403 million USD in March 2024. This pattern suggests resilience and growth in sales after a period of downturn.

Working Capital Turnover

Working capital turnover, calculated as a ratio, was not reported in the initial quarters but from March 2020 onward it shows a fluctuating pattern. The ratio started relatively high at 7.54 and increased to 8.04 in June 2020 before declining sharply to 3.65 by December 2020. During 2021 and early 2022, the turnover remained stable between roughly 3.5 and 4.9, indicating moderate efficiency in using working capital to support sales. A significant improvement is observed beginning in late 2022, with ratios rising to 14.84 by December 2023, denoting much higher efficiency. This peak was followed by a decline to 8.65 in March 2024, still maintaining a higher level than previous years.

Overall, the data suggests that while working capital levels showed variability with periods of increase and decrease, net sales demonstrated a recovery trend with growth beyond pre-decline levels. The working capital turnover ratio reflects improved efficiency in utilizing working capital to generate sales, especially in the most recent periods, although some volatility remains. These trends indicate enhanced operational performance and sales growth, tempered by some fluctuations in liquidity management.

Inventory Turnover Ratio

The inventory turnover ratio exhibits a generally declining trend from early 2020 through most of 2022, starting at 5.05 in March 2020 and decreasing to a low point of 3.6 in September 2022. This suggests a slower turnover of inventory during this period. From late 2022 onward, the ratio improves, rising steadily from 3.81 in December 2022 to 4.55 by September 2023, before slightly decreasing to 4.47 in March 2024. This recovery indicates an improvement in inventory management or increased sales relative to inventory held towards the end of the period under analysis.

Average Inventory Processing Period (Number of Days)

The average inventory processing period moves inversely to the inventory turnover ratio, increasing from 72 days in March 2020 to a peak of 101 days in September 2022. This increase confirms slower inventory movement and longer holding periods during this interval. After September 2022, the processing period shortens progressively, decreasing to 80 days by December 2023, before rising slightly to 82 days in March 2024. This reduction after the peak suggests a more efficient inventory cycle, aligning with the improved turnover ratio.

Overall Analysis

The data reveal a period of inventory management challenges or reduced sales velocity beginning in early 2020, continuing until late 2022, characterized by declining inventory turnover and lengthening processing periods. Subsequent quarters show a clear reversal, with improving turnover and shortening holding periods, signaling enhanced operational efficiency or stronger sales momentum. The slight uptick in the processing period at the end of the period analyzed may warrant monitoring, but overall trends point to recovery and more effective inventory utilization in recent quarters.

The analysis of the receivables turnover and the average receivable collection period reveals several notable trends over the observed quarters.

Receivables Turnover

The ratio begins at 6.42 in March 2020, showing a decline through June and September 2020, reaching a low of 4.96 in July 2021. Following this period, there is a general upward trend, with the turnover ratio increasing steadily to 6.23 by December 2023, and slightly higher at 6.3 by March 2024. This indicates an initial slowdown in the frequency of receivables being collected per year, followed by an improvement in turnover efficiency in the subsequent periods.

Average Receivable Collection Period

Mirroring the turnover trend, the average collection period starts at 57 days in March 2020 and lengthens to a peak of 74 days by July 2021. After this peak, a gradual reduction in the collection period is observable, decreasing to 59 days by March 2024. This trend suggests that after a period of longer collection times, the company enhanced its collection efforts or customer payment behavior improved, resulting in a faster conversion of receivables into cash.

Relationship Between Ratios

The inverse relationship between the receivables turnover and the average collection period is evident: as the turnover ratio declines, the average collection period extends, and vice versa. This inverse movement confirms consistency and reflects the dynamics in accounts receivable management over the observed timeframe.

Insights and Implications

The decline in receivables turnover paired with longer collection periods during 2020 and early 2021 may reflect challenges in credit control or external economic factors affecting customer payments. The subsequent improvement indicates a return to more efficient receivables management, which could contribute positively to cash flow and working capital optimization.

Average Inventory Processing Period

The average inventory processing period shows an increasing trend from 72 days in early 2020 to a peak of 101 days by the end of 2022. After reaching this peak, the period gradually decreases to 80 days by the second quarter of 2023 before experiencing a slight rise to 82 days by the end of the first quarter 2024. This pattern indicates growing inventory holding times through much of the period, suggesting slower inventory turnover, followed by a modest improvement in recent quarters.

Average Receivable Collection Period

The average receivable collection period starts at 57 days in the first quarter of 2020 and generally increases to a high of 74 days during the middle of 2021. Subsequently, it fluctuates around the mid-60s to low 70s days range, with a slight declining trend toward the end of the series, concluding at 59 days in the first quarter of 2024. This variation implies some challenges in collections during 2021, with some recovery and stabilization thereafter.

Operating Cycle

The operating cycle closely tracks the combined effects of inventory processing and receivable collection periods. It rises steadily from 129 days in early 2020 to a peak of 168 days in late 2022, followed by a moderate decline to 140 days in mid-2023. The cycle then remains relatively stable, ending at 141 days in the first quarter 2024. This overall pattern suggests an elongation of the total cash-to-cash cycle during the height of recent operational challenges, with partial normalization more recently.

The payables turnover ratio exhibits variability over the observed periods, with initial data starting from March 2020. The ratio declines from 6.94 to a low of 4.82 by June 2021, indicating a slower rate of paying off suppliers during this time frame. Subsequently, the ratio improves, reaching 6.07 in December 2021, suggesting more efficient payables management toward the end of that year. The turnover ratio moderates thereafter, fluctuating between approximately 4.95 and 6.06, with the latest figure at 5.75 in the first quarter of 2024. This pattern reflects periods of both accelerated and decelerated payments to creditors, possibly influenced by operational or market conditions.

The average payables payment period, measured in days, complements the turnover ratio analysis. Starting from 53 days in March 2020, the payment period lengthens substantially, peaking at 76 days by June 2021. This lengthening confirms the slowdown in payments suggested by the drop in turnover ratio. Following this peak, there is a gradual reduction in the payment period, reaching 60 days by March 2024, indicating a trend toward quicker payments compared to the mid-point of the timeline.

Overall, the inverse relationship between payables turnover and average payment period is evident, as expected. The data reveal an initial phase of extended payment terms, possibly reflecting liquidity management strategies during uncertain conditions. The later improvement toward higher turnover and shorter payment periods suggests a recovery or strategic shift aimed at restoring supplier relations or optimizing working capital. The variations in these metrics highlight the company’s dynamic approach to managing payables in response to evolving financial or operational circumstances.

Inventory Processing Period

The average inventory processing period exhibits an upward trend from early 2020 through late 2022, increasing from 72 days in March 2020 to a peak of 101 days in September 2022. Following this peak, there is a noticeable decline to 80 days by March 2024, indicating improved inventory turnover efficiency in recent quarters.

Receivable Collection Period

The receivable collection period shows moderate fluctuations over the covered quarters. Starting at 57 days in March 2020, it increases to a high of 74 days in July 2021, then generally oscillates between the low 60s and low 70s. From mid-2023 onward, a declining trend emerges, reaching 59 days by March 2024, suggesting improvements in collections.

Payables Payment Period

The average payables payment period rises steadily from 53 days in March 2020, reaching a high of 76 days in July 2021. After this peak, a fluctuating but generally declining trend is observed, with values decreasing to around 62–63 days by the end of 2023 and early 2024. This pattern may reflect changes in payment practices or supplier terms.

Cash Conversion Cycle

The cash conversion cycle initially increases from 76 days in March 2020 to highs near 95 days between September 2020 and September 2022, indicating a lengthening of the time taken to turn resource inputs into cash inflows. From late 2022 onward, the cycle shortens steadily, declining to 78 days by March 2024, signaling an improvement in overall working capital efficiency.