Stepan Company (SCL)

Stepan Co.'s liquidity ratios have been showing a downward trend over the past five years. The current ratio, which measures the company's ability to cover short-term obligations with its current assets, decreased from 2.41 in 2019 to 1.40 in 2023. This declining trend indicates a decrease in the company's short-term liquidity.

Similarly, the quick ratio, which provides a more stringent measure of liquidity by excluding inventories from current assets, remained constant at 0.96 in 2022 and 2023 after a gradual decline from 1.81 in 2019. This indicates that the company may have had difficulty meeting its short-term obligations with its most liquid assets.

The cash ratio, which measures the company's ability to cover its current liabilities with its cash and cash equivalents, has also shown a decreasing trend from 1.00 in 2019 to 0.27 in 2023. This implies that Stepan Co. has become less effective in maintaining enough cash to cover its short-term obligations.

Overall, Stepan Co.'s liquidity ratios suggest a weakening liquidity position over the past five years, indicating a potential risk in meeting its short-term financial obligations. Further analysis and proactive measures may be required to improve the company's liquidity position and mitigate financial risk.

---

Additional liquidity measure

Over the past five years, Stepan Co. has exhibited fluctuations in its cash conversion cycle, a key metric that reflects the time it takes for the company to convert its investments in inventory and other resources into cash flows from sales. In 2023, the cash conversion cycle increased to 72.03 days, marking a longer period compared to the prior year which stood at 61.67 days.

The increase in the cash conversion cycle from 2022 to 2023 suggests that Stepan Co. may have experienced challenges in efficiently managing its working capital and converting its inventory and receivables into cash. This lengthening of the cycle could indicate possible issues in inventory control, slower collections from customers, or a higher level of investment in working capital.

Comparing the current year's cycle to 2021 and 2020, where the figures were 61.94 days and 54.41 days respectively, it is notable that Stepan Co. has generally seen an upward trend in the cash conversion cycle over the past three years. This trend might indicate a need for the company to focus on streamlining its operational efficiency, improving inventory turnover, and enhancing receivables management to shorten the cycle and release cash for other strategic purposes.

Although the cycle in 2023 is higher than in previous years, it is still better than the figure recorded in 2019, which was 56.61 days. This improvement from 2019 to 2023 indicates that the company had managed to shorten its cash conversion cycle initially but faced challenges in maintaining this efficiency in the most recent period.

Overall, Stepan Co. should analyze the factors contributing to the increased cash conversion cycle in 2023 and implement strategies to enhance working capital management and optimize the cash conversion process to ensure the company's continued financial health and operational effectiveness.