Johnson Controls International plc (NYSE:JCI)

The analysis of short-term operating activity ratios reveals a period of relative stability in receivable and payable management, contrasted by a fluctuating trend in inventory efficiency and volatile working capital turnover.

Inventory Management

Inventory turnover peaked in 2019 at 8.97 before entering a steady decline to 6.42 by 2023. This downward trend is mirrored in the average inventory processing period, which decreased to 41 days in 2019 but has since climbed to 57 days. This indicates a reduction in the speed at which inventory is converted into sales over the latter half of the period.

Receivables Management

Receivables turnover has remained remarkably consistent, fluctuating within a narrow range between 4.15 and 4.58. Consequently, the average receivable collection period has shown minimal variance, remaining between 80 and 88 days. This suggests a stable credit policy and consistent collection efficiency throughout the six-year period.

Payables Management

A general trend toward extending the payment period to suppliers is evident. The payables turnover ratio declined from 4.74 in 2018 to 4.18 in 2023. Correspondingly, the average payables payment period increased from 77 days to 87 days, peaking at 91 days in 2022. This indicates a strategic shift toward utilizing supplier credit to support short-term liquidity.

Operating and Cash Conversion Cycles

The operating cycle has remained stable, ranging from 129 to 139 days, reflecting a consistent total time to convert raw materials into cash from sales. The cash conversion cycle showed an overall improvement from 58 days in 2018 to 52 days in 2023, reaching a low of 43 days in 2022. This improvement was primarily driven by the extension of the payables payment period, which offset the increase in the inventory processing period.

Working Capital Efficiency

Working capital turnover exhibits significant volatility, with a sharp decline in 2019 followed by a steady recovery to 56.72 in 2022. These fluctuations suggest substantial changes in the composition or scale of current assets and liabilities relative to annual revenue.

The analysis of short-term operating activity reveals a fluctuating pattern in inventory management over the six-year period ending September 30, 2023. While the cost of sales experienced a sharp contraction between 2018 and 2020 before entering a recovery phase, inventory levels have shown a consistent upward trajectory since 2020, impacting overall efficiency.

Inventory Turnover Trend

The inventory turnover ratio peaked in 2019 at 8.97, marking the period of highest operational efficiency in managing stock relative to the cost of sales. However, from 2020 through 2023, a persistent downward trend is observed, with the ratio declining annually from 8.41 to 6.42.

Correlation Between Cost of Sales and Inventory Levels

Between 2018 and 2019, a significant reduction in inventory levels from US$ 3,224 million to US$ 1,814 million outpaced the decline in the cost of sales, which drove the initial increase in the turnover ratio. Conversely, from 2021 onward, inventory levels grew steadily from US$ 2,057 million to US$ 2,776 million. Although the cost of sales also increased during this period—rising from US$ 15,609 million in 2021 to US$ 17,822 million in 2023—the growth in inventory holdings exceeded the growth in the cost of sales, leading to the systematic decline in the turnover ratio.

Operational Efficiency Observations

The steady decrease in the turnover ratio since 2019 indicates a slowing rate of inventory liquidation. This suggests that a larger volume of capital is being tied up in stock relative to the volume of goods sold, which may reflect changes in supply chain strategy, an increase in safety stock levels, or a misalignment between inventory accumulation and sales demand.

Between 2018 and 2023, net sales underwent a period of volatility, characterized by a sharp contraction from 2018 to 2020, followed by a consistent recovery phase through 2023. Accounts receivable exhibited a proportional trend, decreasing as sales fell and gradually rising as sales regained momentum.

Receivables Turnover Stability

The receivables turnover ratio remained remarkably stable throughout the observed period, fluctuating within a narrow range between a low of 4.15 in 2019 and a high of 4.58 in 2022. This consistency indicates a disciplined approach to credit management and a stable average collection period regardless of the fluctuations in overall revenue volume.

Efficiency Trends

A slight dip in turnover efficiency was observed in 2019, coinciding with the initial sharp decline in net sales. Efficiency improved over the subsequent years, peaking in 2022 at 4.58 before settling at 4.46 in 2023. The minimal variance in these ratios suggests that internal controls regarding the conversion of receivables to cash have remained effective across different operational scales.

Asset Management Correlation

The alignment between the movement of net sales and accounts receivable indicates that credit exposure was scaled in proportion to business volume. Because the growth in receivables from 2021 to 2023 mirrored the growth in sales, the turnover ratio did not deteriorate, thereby mitigating liquidity risks associated with the expansion of credit sales.

The financial data reveals a fluctuating trend in operating activity related to accounts payable and cost of sales from 2018 to 2023. A significant reduction in both cost of sales and accounts payable occurred between 2018 and 2020, followed by a period of steady recovery and growth through 2023.

Cost of Sales and Accounts Payable Volatility

Cost of sales experienced a sharp decline from US$ 22,020 million in 2018 to a low of US$ 14,906 million in 2020. Following this trough, a consistent upward trend was observed, with values rising to US$ 17,822 million by 2023. Accounts payable followed a near-identical trajectory, decreasing from US$ 4,644 million in 2018 to US$ 3,120 million in 2020, and subsequently recovering to US$ 4,268 million by the end of the period.

Payables Turnover Ratio Trends

The payables turnover ratio remained relatively stable but shifted toward a lower average in the latter half of the period. The ratio peaked at 4.78 in 2020, coinciding with the lowest observed levels of cost of sales. A downward trend followed, reaching a minimum of 4.00 in 2022, before a slight correction to 4.18 in 2023.

Working Capital and Payment Efficiency

The overall transition from a turnover ratio of 4.74 in 2018 to 4.18 in 2023 indicates a deceleration in the frequency with which supplier obligations are settled. This reduction in turnover suggests an extension of the average payment period, which typically reflects an increase in the company's ability to retain cash for longer durations or a strategic shift in credit terms negotiated with vendors.

The analysis of operating activity from 2018 to 2023 reveals a significant shift in the management of short-term assets and liabilities relative to revenue generation. A clear trend of decreasing working capital is observed, culminating in a negative position by the end of the period, despite a gradual recovery in net sales after 2020.

Working Capital Trends

Working capital experienced a substantial increase in 2019, peaking at US$ 3,323 million. This was followed by a consistent year-over-year decline through 2022, eventually shifting to a negative value of US$ -347 million in 2023. This trajectory suggests a strategic move toward leaner operating liquidity or a shift in the financing of short-term obligations.

Net Sales Performance

Net sales exhibited a contraction between 2018 and 2020, falling from US$ 31,400 million to a low of US$ 22,317 million. However, a steady upward trend is evident from 2021 onward, with sales reaching US$ 26,793 million by September 30, 2023, indicating a sustained recovery in top-line revenue.

Working Capital Turnover Dynamics

The working capital turnover ratio showed significant volatility. A sharp decline occurred in 2019, falling to 7.21, which coincides with the spike in working capital. Subsequently, the ratio rose steadily to 56.72 by 2022. This upward trend indicates increasing efficiency in utilizing net current assets to generate sales. The lack of a ratio for 2023 is a result of working capital becoming negative, which renders the traditional turnover calculation mathematically inapplicable.

The analysis of inventory activity from 2018 to 2023 reveals a period of initial efficiency improvement followed by a consistent multi-year decline in inventory processing performance. While operational metrics peaked in 2019, the subsequent four years demonstrate a steady increase in the time required to convert inventory into sales.

Inventory Turnover Ratio

The inventory turnover ratio exhibited a sharp increase from 6.83 in 2018 to a peak of 8.97 in 2019. Following this peak, a persistent downward trend is observed, with the ratio declining annually to 8.41 in 2020, 7.59 in 2021, 6.76 in 2022, and reaching a period low of 6.42 by September 30, 2023. This trend indicates a slowing rate of inventory circulation.

Average Inventory Processing Period

The average inventory processing period demonstrates an inverse correlation with turnover rates. The period reached its minimum of 41 days in 2019, representing the highest level of efficiency in the analyzed timeframe. Thereafter, the processing period expanded consistently, rising to 43 days in 2020 and continuing an upward trajectory to reach 57 days by September 30, 2023.

The convergence of a declining turnover ratio and an increasing processing period suggests a reduction in inventory liquidity. By the end of the observed period in 2023, the processing period of 57 days had not only erased the gains made in 2019 but had also surpassed the initial 2018 baseline of 53 days, signaling a long-term deceleration in the inventory cycle.

The analysis of operating activity ratios from 2018 to 2023 indicates a stable pattern of receivables management, characterized by minor fluctuations in both turnover speed and collection timelines.

Receivables Turnover

The receivables turnover ratio remained relatively consistent over the six-year period, oscillating within a narrow range between 4.15 and 4.58. A decline was observed in 2019, where the ratio reached a low of 4.15, followed by a period of stability at 4.22 during 2020 and 2021. The highest level of efficiency occurred in 2022 with a ratio of 4.58, before adjusting to 4.46 in 2023.

Average Receivable Collection Period

The collection period mirrored the turnover trends, increasing from 82 days in 2018 to a peak of 88 days in 2019, which indicates a temporary slowdown in the conversion of receivables to cash. Following this peak, the period remained elevated at 87 days through 2021. A notable improvement in collection efficiency was recorded in 2022, reaching a minimum of 80 days. By 2023, the collection period returned to 82 days, effectively reverting to the baseline established in 2018.

The inverse correlation between the turnover ratio and the collection period demonstrates a consistent approach to credit management. The return to an 82-day collection cycle by the end of the analyzed period suggests that the temporary increase in the collection window observed between 2019 and 2021 was successfully mitigated, maintaining a stable working capital cycle.

The operating cycle exhibits a period of relative stability between 2018 and 2023, though a gradual increase is observed in the most recent years. While the total cycle fluctuated between a minimum of 129 days in 2019 and a maximum of 139 days in 2023, the underlying components reveal diverging trends in inventory management and receivables collection.

Average Inventory Processing Period

A notable volatility is observed in inventory processing. Following a decrease from 53 days in 2018 to 41 days in 2019, a consistent upward trend emerged. The period expanded steadily from 43 days in 2020 to 57 days by September 30, 2023. This represents a significant lengthening of the time required to convert raw materials and work-in-progress into finished goods sold, suggesting a potential decrease in inventory turnover efficiency or a strategic shift toward higher safety stock levels.

Average Receivable Collection Period

The collection period remained comparatively stable throughout the analyzed period, fluctuating within a narrow range of 80 to 88 days. A peak of 88 days occurred in 2019, followed by a period of stability around 87 days, and a slight improvement to 80 days in 2022. The period closed at 82 days in 2023, indicating a consistent and predictable credit collection process with little variance in customer payment behavior over the six-year horizon.

Operating Cycle Integration

The overall operating cycle is primarily driven by the receivables collection period, which constitutes the largest portion of the cycle. However, the net increase in the operating cycle from 129 days in 2019 to 139 days in 2023 is almost entirely attributable to the deterioration in the inventory processing period. The stability of the receivables component prevented a more pronounced expansion of the total cycle, but the rising inventory days have created a slight upward pressure on the company's short-term asset liquidity.

The analysis of operating activity ratios indicates a general trend toward extended payment terms for obligations to suppliers over the period from 2018 to 2023. This progression reflects a decrease in the frequency of payables turnover and a corresponding increase in the duration of the payment cycle.

Payables Turnover

A general decline in the payables turnover ratio is observed, moving from 4.74 in 2018 to 4.18 in 2023. Although a peak of 4.78 was recorded in 2020, the ratio subsequently dropped to a low of 4.00 in 2022 before showing a marginal recovery in 2023. This downward trend suggests a reduction in the frequency with which the company settles its average accounts payable balance.

Average Payables Payment Period

The average period for settling payables exhibits an overall upward trajectory, increasing from 77 days in 2018 to 87 days in 2023. A notable expansion in the payment cycle occurred between 2020 and 2022, where the duration rose from 76 days to a peak of 91 days. The slight reduction to 87 days in 2023 indicates a relative stabilization of payment terms following the significant increase observed in the preceding two fiscal years.

The analysis of the operating activity ratios reveals a fluctuating but generally managed cash conversion cycle over the six-year period ending September 30, 2023. While the cycle reached its most efficient point in 2022, a recent upward trend in 2023 indicates a slowdown in the velocity of cash recovery.

Average Inventory Processing Period

Inventory management exhibited significant volatility. Following a sharp decrease to 41 days in 2019, there has been a consistent and steady increase in the time required to process inventory, reaching a period high of 57 days by 2023. This upward trajectory suggests a gradual accumulation of stock or a slowing of inventory turnover rates over the last four years.

Average Receivable Collection Period

The collection of receivables has remained relatively stable, oscillating within a narrow range between 80 and 88 days. A slight peak occurred in 2019 at 88 days, followed by a period of stability and a brief improvement to 80 days in 2022. The return to 82 days in 2023 indicates a consistent credit policy and steady customer payment behavior.

Average Payables Payment Period

An overall upward trend is observed in the payment of payables, increasing from 77 days in 2018 to a peak of 91 days in 2022. This extension of payment terms acted as a critical cash flow buffer, effectively offsetting the increasing inventory processing times. A slight contraction to 87 days occurred in 2023, though the period remains higher than the 2018-2020 average.

Cash Conversion Cycle (CCC)

The cash conversion cycle experienced a general downward trend from 58 days in 2018 to a minimum of 43 days in 2022, representing an improvement in operational liquidity. This efficiency was primarily driven by the strategic extension of payables payment periods. However, the cycle widened to 52 days in 2023, a result of the combined impact of the longest observed inventory processing period and a slight reduction in the payables payment window.