Module Five Activity

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Southern New Hampshire University *

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320

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Apr 3, 2024

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Module Five Activity: Working Capital Tyesha Williams Southern New Hampshire University FIN 320 February 11, 2024 Suleman Braimah

Working capital measures, a company’s short-term financial health and its liquidity throughout its operations. Fernando (2023) says "Working capital is like the checkbook for the business; it's a measure of the short-term financial health of the company.” Computing working capital requires two financial statements which are the balance sheet and income statement. Furthermore, the formula for determining working capital requires the company’s current assets and current liabilities. To determine working capital total current liabilities are subtracted from the total current assets. The balance sheet offers a glimpse of the company’s financial stance at a particular moment in time. Furthermore, a company can locate its current assets and liabilities as well as shareholder’s equity in its balance sheet. The income statement does not provide specific items needed to compute working capital; however, it offers vital information regarding the effectiveness of operations and the company’s profitability, which affects working capital. For example, companies that make a substantial amount of profits will have more money accessible for use, increasing assets and hence its working capital. Having a positive working capital implies that a company has an adequate number of assets to cover its short-term liabilities. Conversely, having a negative working capital indicates impending liquidity challenges. Chipotle Mexican Grill currently has a positive working capital is 590.09 million based on the increasing amount of sales and opening of more locations. Looking at Chipotle’s balance sheet, it can be determined that the company has a significant amount of working capital and as a result, it will continue to have potential growth opportunities and improvement of its operations. Efficient management of working capital is essential for a business's financial health and operational success. Liquidity, solvency, profitability, and business continuity are important in managing working capital. Moreover, sufficient working capital confirms that a company can accomplish its short-term commitments, for instance, payments to suppliers, employees, and

operating expenses. Effective working capital management assists in maintaining solvency by guaranteeing the business can meet its long-term obligations. In addition, profitability can be improved through the management of receivables, payables, and inventory. Adequate working capital guarantees that a company can maintain operations even in times of financial worry. Overall, a company that has a significant amount of cash flow will be able to meet its short-term obligations and invest in potential growth opportunities. To determine whether Chipotle Mexican Grill has enough working capital ready to address bills to suppliers and if there will be potential cash inflow at the end of the year the use of the third quarter numbers from the balance will be used. To compute its working capital subtracting total current liabilities of 1087.707 million from 1669.43 million in total current assets provides a total of 581.723 in working capital. Furthermore, the company’s liquidity is computed by dividing total current assets by total current liabilities which gives a result of a 1.53 current ratio. This illustrates a positive working capital which implies that Chipotle Mexican Grill Inc. has enough to readily address bills to suppliers. Furthermore, comparing 2023 third- quarter results and 2022 third-quarter results shows a substantial amount of growth thus proving that it will be potential cash inflow at the end of the year. The table below was a determining factor for addressing the specific questions. Item 2023 2022 Current Ratio 1.53 1.32 Working capital 581.723 259.575 Debt Ratio .64 .66 Earnings Per Share 11.39 9.26 Price Earnings Ratio 168.33 155.28 Total Asset Turnover Ratio .31 .33 Financial Leverage 2.74 2.93 Net Profit Margin .13 .12 Return on Assets .04 .04 Return on Equity 0 0

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Chipotle Mexican Grill Inc., a leading fast-casual restaurant chain, has demonstrated a trend of efficient working capital management over the last four years. Working capital management requires the processing of current assets and current liabilities to make certain adequate cash flow to meet short-term operating costs and debts. Therefore, utilizing the current ratio, and working capital allows Chipotle's working capital management trend to be analyzed. Item 2023 2022 2021 2020 Current Ratio 1.53 1.32 1.78 1.51 Working Capital 581.723 259.575 667.642 409.563 Looking over the last four years Chipotle Mexican Grill has illustrated a trend of maintaining a healthy current ratio, implying good liquidity. Furthermore, there was a decline in the 2022 third quarter’s working capital possibly due to the pandemic. Overall, most of the ratios remained stable, indicating that it can meet its short-term obligations without relying profoundly on inventory sales. Chipotle's working capital turnover ratio has mostly been sharp, demonstrating effective utilization of working capital.

References Chipotle announces third quarter 2023 Results - Oct 26, 2023. (n.d.). https://ir.chipotle.com/2023-10-26-CHIPOTLE-ANNOUNCES-THIRD-QUARTER-2023- RESULTS#:~:text=Total%20revenue%20in%20the%20third%20quarter%20was,to%20higher %20transactions%20and%2C%20to%20a%20lesser Fernando, J. (2023, December 19). Working Capital: Formula, components, and limitations. Investopedia. https://www.investopedia.com/terms/w/workingcapital.asp Mergent online. (n.d.). https://www.mergentonline.com/login.php