Illinois Tool Works Inc. (NYSE:ITW)

The analysis of the liquidity ratios over the observed periods reveals several noteworthy trends in the company's short-term financial health.

Current Ratio

The current ratio exhibited an initial decline from 2.2 to 1.53 between the first quarter of 2018 and the first quarter of 2019, indicating a reduction in current assets relative to current liabilities. Subsequently, there was a significant increase, peaking at 2.9 in the fourth quarter of 2019. Following this peak, the ratio fluctuated but demonstrated a gradual downward trend into 2021, ending at 1.84. This overall pattern suggests an initial weakening, a period of strengthened liquidity, and a later easing of liquidity levels.

Quick Ratio

The quick ratio followed a similar pattern to the current ratio but at consistently lower levels, reflecting the exclusion of inventory from liquid assets. It declined from 1.65 in early 2018 to approximately 1.13 by the first quarter of 2019, signaling reduced immediate liquidity. A marked improvement then occurred, with the ratio rising to slightly above 2.0 by the end of 2019. Subsequently, the ratio diminished steadily through 2021, culminating at 1.26. This indicates that, although the company's ability to cover short-term liabilities without relying on inventory improved substantially for a period, it moderated in recent quarters.

Cash Ratio

The cash ratio displayed the most pronounced volatility among the liquidity metrics. It started at 0.66 in the first quarter of 2018, dipped to around 0.42 by the end of the same year, then experienced a sharp increase, reaching 0.92 in the fourth quarter of 2019. The ratio maintained elevated levels near or above 0.85 through 2020 and early 2021, signifying strong cash and cash equivalents coverage of current liabilities during this period. However, in the last quarters observed, the ratio declined substantially, reaching 0.44 by the end of 2021, which reflects a reduction in readily available cash resources relative to short-term obligations.

Overall, the company’s liquidity position showed an initial weakening followed by a strong recovery phase, with peak liquidity observed near the end of 2019. Thereafter, a gradual decline in liquidity ratios was evident, suggesting a cautious shift in working capital management or changes in operational cash flows. Despite this decline, liquidity levels remained within prudent ranges throughout the period assessed.

Current Assets

Current assets demonstrated a generally stable trend from March 2018 through December 2021, with values oscillating mostly between approximately 5,500 million and 6,700 million US dollars. The lowest recorded value appears in March 2020 at 5,506 million, coinciding with the onset of the global pandemic, whereas the highest value is noted in March 2021 at 6,704 million. A notable decrease occurred from December 2019 (6,253 million) to March 2020, followed by a recovery and gradual increase through early 2021 before slightly declining towards the end of 2021.

Current Liabilities

Current liabilities showed a fluctuating pattern over the observed periods. The highest value within 2018 was 3,663 million in September, followed by a marked decline in 2019, reaching a low of 2,154 million in December 2019. Subsequently, liabilities remained relatively consistent through 2020, ranging between 2,032 million and 2,589 million. However, an upward trend became evident in 2021, culminating at 3,470 million in December 2021, which is near the peak levels previously observed in 2018.

Current Ratio

The current ratio, indicating liquidity by comparing current assets to current liabilities, showed considerable variability. Initial values in 2018 declined from 2.2 in March to approximately 1.62-1.63 in September and December. In 2019, the ratio surged, peaking at 2.9 in December, reflecting a decrease in liabilities relative to assets during that period. From early 2020 through 2021, values fluctuated mostly between 1.84 and 2.75, suggesting a maintained but slightly weakening liquidity position towards the end of 2021. The lowest current ratio was 1.53 in March 2019, whereas the highest was 2.9 in December 2019.

Overall Analysis

The company’s liquidity profile has generally been stable with manageable fluctuations over the observed period. The increase in current ratio in late 2019 suggests beneficial management of working capital, likely through a reduction in liabilities. The pandemic period manifested in a slight dip in current assets and a stabilizing of liabilities. The rising liabilities noted in 2021 could indicate increased operational commitments or investment activity, slightly reducing the liquidity ratio by the year's end. Despite these fluctuations, the current ratio has mostly stayed above 1.5, maintaining a reasonable buffer for short-term obligations.

The analysis of the quarterly financial data reveals several trends in liquidity and the short-term financial position over the examined four-year period.

Total Quick Assets

Total quick assets exhibit a general decline from early 2018 through the end of 2018, starting at 4,814 million USD and decreasing to 4,126 million USD. A moderate recovery takes place throughout 2019, with fluctuations but generally stable values around 4,300 to 4,400 million USD. However, from the first quarter of 2020 onwards, quick assets initially decline to a low of 3,854 million USD but then improve steadily, peaking at 5,070 million USD by the end of 2020. Nonetheless, a downward trend resumes in 2021, ending the year at 4,367 million USD, suggesting some variability but a net reduction over the full term.

Current Liabilities

Current liabilities show more volatility across the period. There is a sharp increase from the first quarter of 2018 through the first quarter of 2019, rising from 2,925 million USD to 3,961 million USD. This is followed by an abrupt decline in mid-2019, reaching a trough near 2,154 million USD at the end of 2019. During 2020, liabilities fluctuate moderately between approximately 2,000 and 2,600 million USD. However, from early 2021 to the end of the year, current liabilities consistently trend upward, climbing from 2,680 million USD to 3,470 million USD. The notable swings in current liabilities throughout the period suggest shifts in short-term obligations and possibly working capital management strategies.

Quick Ratio

The quick ratio mirrors the fluctuations seen in assets and liabilities but emphasizes changes in liquidity position. The ratio declines steadily in 2018 from 1.65 to 1.16, indicating a weakening of immediate liquidity relative to current liabilities. A significant and rapid improvement occurs in the first half of 2019, with the ratio jumping to 1.97 and maintaining elevated levels slightly below 2.06 through the end of 2019, reflecting a strengthened liquidity buffer. During 2020, the ratio remains relatively stable, hovering between 1.84 and 1.96, before declining throughout 2021 to a low of 1.26 by year-end, signaling a reduction in liquidity coverage against current liabilities.

Overall, the data reveal a weakening liquidity position throughout 2018, followed by improved short-term financial cushioning in 2019 and 2020. The trends in 2021, however, indicate a reversal with reduced quick assets relative to rising current liabilities, contributing to a downward movement in the quick ratio. This pattern suggests evolving challenges in maintaining liquidity levels amid changing operational or market conditions in the most recent period.

The analysis of the quarterly financial data reveals several notable trends in key liquidity metrics over the observed period.

Total cash assets (US$ in millions)

Cash assets show a fluctuating pattern across quarters. Initially, there is a gradual decline from $1,940 million at the end of Q1 2018 to $1,504 million by the end of Q4 2018. Subsequently, cash assets increase moderately entering 2019, peaking at $1,981 million at the end of Q4 2019. The year 2020 records a general upward trend, reaching a high of $2,564 million at the end of Q4 2020. In 2021, cash holdings experience a decline through mid-year, falling from $2,484 million at Q1 to $1,527 million by Q4.

Current liabilities (US$ in millions)

Current liabilities display variability with some distinct shifts. From Q1 2018 ($2,925 million), liabilities increase until Q3 2018 ($3,663 million), then slightly decrease through Q4 2018. In 2019, liabilities drop sharply in Q2 ($2,188 million) after a peak in Q1 ($3,961 million), and then stabilize near $2,100-$2,200 million through Q4. In 2020, liabilities maintain a gradual increase from about $2,032 million in Q1 to $2,589 million by year-end. The trend reverses in 2021, with liabilities rising steadily throughout the year, reaching a peak of $3,470 million in Q4.

Cash ratio (ratio)

The cash ratio, defined as cash assets divided by current liabilities, underscores liquidity conditions. Initially, the ratio begins at 0.66 in Q1 2018 and declines to a low of 0.42 by Q4 2018, reflecting weaker liquidity. It then strengthens significantly in 2019, peaking at 0.92 at the end of the year, indicative of improved short-term financial health. In 2020, the cash ratio remains relatively strong, crossing 0.99 in Q4 before gradually tapering off in 2021. The liquidity ratio falls from 0.93 in Q1 2021 to 0.44 by Q4 2021, signaling reduced liquidity by year-end.

Overall, the financial position as measured by cash assets and liquidity exhibited cyclical behavior, with particularly strong liquidity at the end of 2019 and 2020. Nonetheless, there is a visible contraction in liquidity by the close of 2021, driven by decreasing cash reserves combined with a rise in current liabilities. These trends suggest a more constrained cash position and increased short-term obligations at the end of the most recent period.