LGI Homes (LGIH)

Based on the provided data, LGI Homes' liquidity ratios show varying levels of liquidity over the specified periods.

1. Current Ratio:
The current ratio measures LGI Homes' ability to cover its short-term obligations with its current assets. The current ratio fluctuates significantly, ranging from a high of 25.16 on December 31, 2024, to a low of 7.73 on March 31, 2023. Overall, the current ratio appears to be relatively strong, with most values well above 1, indicating that LGI Homes has more than enough current assets to cover its short-term liabilities.

2. Quick Ratio:
The quick ratio, also known as the acid-test ratio, provides a more stringent measure of liquidity by excluding inventory from current assets. LGI Homes' quick ratio also exhibits fluctuations, with values ranging from a low of 0.09 on December 31, 2022, to a high of 0.93 on June 30, 2021. Despite some variability, the quick ratio generally remains above 0.5, indicating that LGI Homes has an acceptable level of liquid assets to meet immediate obligations without relying on selling inventory.

3. Cash Ratio:
The cash ratio is the most conservative liquidity metric and measures LGI Homes' ability to cover current liabilities with its cash and cash equivalents alone. The cash ratio follows a similar trend as the quick ratio, showing fluctuations between 0.09 on December 31, 2022, and 0.93 on June 30, 2021. While the cash ratio is lower than the quick ratio, it still demonstrates LGI Homes' ability to meet short-term liabilities with readily available cash resources.

In conclusion, LGI Homes generally maintains a strong liquidity position, as evidenced by its current, quick, and cash ratios staying above the respective benchmark levels of 1, 0.5, and 0.2. However, monitoring these ratios regularly is crucial to ensure that the company can effectively manage its short-term financial obligations.

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Additional liquidity measure

The cash conversion cycle of LGI Homes has shown fluctuations over the past several quarters. The cash conversion cycle represents the time it takes for the company to convert its investments in inventory and other resources into cash flows from sales.

Initially, in March 2020, the cash conversion cycle stood at 353.84 days, indicating a relatively long period for the company to complete a full cash cycle. Over the following quarters, there were fluctuations in the cycle, with it declining to 297.73 days by June 2021, representing an improvement in efficiency in managing inventory, accounts receivable, and accounts payable.

However, from June 2021 to December 2024, the cash conversion cycle consistently increased, reaching a peak of 740.76 days by the end of December 2024. Such a prolonged cycle could suggest challenges in converting investments into cash, potentially leading to liquidity constraints and increased working capital requirements.

It is essential for LGI Homes to focus on optimizing its inventory management, credit policies, and payment terms with suppliers to shorten the cash conversion cycle. A more efficient cash conversion cycle can enhance the company's liquidity position, improve cash flows, and indicate effective working capital management.