Donaldson Company Inc (DCI)

The liquidity ratios of Donaldson Company Inc. over the period from October 2020 to October 2025 demonstrate a general trend of moderate variability and some gradual shifts indicative of the company's evolving short-term liquidity position.

Current Ratio Analysis:
The current ratio exhibited an initial decline from 2.73 in October 2020 to a low point of 1.70 in July 2023. Subsequently, it stabilized somewhat, with minor fluctuations, and increased marginally to approximately 1.86 by January 2025 before reaching 1.93 in July 2025. Throughout this period, the current ratio remained well above the commonly accepted benchmark of 1.0, indicating that the company consistently maintained more current assets than current liabilities, thus preserving a sound liquidity cushion. The decline from 2.73 to below 2.0 suggests a reduction in the company's ability to cover short-term obligations relative to earlier years, potentially due to changes in working capital management or asset composition. The upward trend in the later years reflects some recovery or adjustment.

Quick Ratio Analysis:
The quick ratio (acid-test ratio) followed a similar downward trend, descending from 1.75 in October 2020 to 0.91 in October 2023. This ratio values more liquid assets by excluding inventory and notes a decline, indicating a tightening of the most liquid assets relative to current liabilities. The trough at 0.91 suggests that, at that point, the company’s most liquid assets were just sufficient to cover less than one current liability, potentially signaling increased short-term liquidity risk. However, from early 2024 onward, the quick ratio rebounded modestly, rising to approximately 1.11 by July 2025, aligning with a modest improvement in immediate liquidity.

Cash Ratio Analysis:
The cash ratio, which measures available cash and cash equivalents against current liabilities, declined substantially from 0.64 in October 2020 to around 0.25 in late 2023. This indicates that cash alone constituted less than a third of current liabilities over much of this period, reflecting a reduced cash buffer but still maintaining some degree of liquidity resilience. From 2024 onward, slight increases in the cash ratio were observed, reaching 0.24 in July 2025, suggesting a modest enhancement in cash holdings relative to short-term obligations.

Overall Assessment:
The company's liquidity position has experienced a moderate weakening over this period, characterized by declining current, quick, and cash ratios. Particularly notable is the sharper decline in the quick and cash ratios starting in late 2022 through 2023, which could point to tighter liquidity conditions or strategic shifts affecting liquid asset holdings. Despite this, all three ratios remained above commonly critical thresholds throughout, implying that Donaldson Company Inc. has generally maintained an adequate capacity to meet short-term liabilities, albeit with less margin than in earlier years.

In conclusion, the liquidity ratios reflect a company that has faced some liquidity challenges, especially in terms of liquid assets, in recent years but continues to retain a baseline capacity to cover short-term obligations. Continuous monitoring would be prudent to assess whether further declines occur or if asset management strategies shift to improve liquidity margins.

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Additional liquidity measure

The analysis of Donaldson Company Inc's cash conversion cycle (CCC) over the period from October 2020 to July 2025 indicates notable fluctuations, with an overall trend towards improvement in recent quarters. The CCC measures the number of days it takes for a company to convert its investments in inventory and other resources into cash flows from sales, thus serving as an indicator of operational efficiency and liquidity management.

Initially, the CCC ranged around 92 to 96 days from October 2020 through mid-2022, with a peak of approximately 96.72 days in April 2022. This suggests that during this period, the company maintained a relatively stable cycle, although somewhat lengthy, indicating room for potential efficiency improvements in managing receivables, inventories, or payables.

From late 2022 onwards, a decreasing trend is observed, with the CCC declining from approximately 94.78 days in July 2022 to about 78.93 days in October 2023. This downward movement reflects improvements in operational efficiency, potentially driven by faster collection processes, inventory management, or extended credit terms with suppliers, which collectively shortened the cycle.

In the most recent periods, forecasted data up to July 2025 indicates a stabilization of the CCC near 87.50 days, with some fluctuation around 79 to 86 days. Notably, the April 2024 and July 2024 projections maintain the cycle around 79.4 days, suggesting a period of operational steadiness. The slight uptick in the last quarter of 2024 and early 2025 may signal minor inefficiencies or adjustments in working capital management.

Overall, the trend demonstrates a gradual reduction in the cash conversion cycle over the analyzed timeframe, reflecting efforts toward enhancing operational efficiency. The company has been able to shorten its cycle from close to 96 days to below 80 days in recent periods, which can positively influence liquidity and cash flow positions. Continued focus on optimizing receivables collection, inventory turnover, and payables management could further improve the cycle duration, contributing to better working capital performance and financial health.