Solventum Corp. (SOLV)

Solventum Corp.'s liquidity ratios provide insights into the company's ability to meet its short-term obligations.

1. Current Ratio: The current ratio measures the company's ability to cover its short-term liabilities with its current assets. Solventum Corp.'s current ratio has been relatively stable over the years, ranging from 1.20 to 1.70. A current ratio above 1 indicates that the company has more current assets than current liabilities, suggesting a healthy liquidity position. However, a decreasing trend from 1.70 in 2022 to 1.20 in 2024 may merit further investigation into the company's ability to cover its short-term obligations.

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. Solventum Corp.'s quick ratio has shown fluctuations over the years, ranging from 0.05 to 0.57. A quick ratio below 1 indicates that the company may have difficulty meeting its short-term obligations without relying on the sale of inventory. The significant increase in the quick ratio from 0.05 in 2022 to 0.57 in 2023 is notable and suggests an improvement in the company's ability to meet immediate liabilities with its most liquid assets.

3. Cash Ratio: The cash ratio is the most conservative liquidity ratio, focusing solely on the company's ability to cover its current liabilities with cash and cash equivalents. Solventum Corp.'s cash ratio has also shown fluctuations over the years, ranging from 0.06 to 0.57. A cash ratio below 1 indicates that the company may need to rely on sources other than cash to meet its short-term obligations. The increase in the cash ratio from 0.06 in 2022 to 0.57 in 2023 indicates an improvement in the company's ability to cover its current liabilities with its available cash resources.

In summary, Solventum Corp. has maintained a relatively healthy liquidity position based on its current, quick, and cash ratios. The fluctuations in these ratios over the years highlight the importance of continuously monitoring the company's ability to meet its short-term obligations and manage its liquidity effectively.

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Additional liquidity measure

The cash conversion cycle of Solventum Corp. has shown fluctuations over the past five years. In 2020, the company achieved a cash conversion cycle of 0.00 days, implying effective management of its working capital. However, in subsequent years, there was an increase in the cash conversion cycle, reaching 91.36 days in 2021, 92.76 days in 2022, 89.27 days in 2023, and 96.21 days in 2024.

This upward trend indicates a potential weakening in the company's efficiency in converting its investments in inventory and accounts receivables into cash. A longer cash conversion cycle suggests that the company takes more time to generate cash from its operating activities, which may be attributed to slower collection of receivables or excess inventory levels.

Solventum Corp. should closely monitor its cash conversion cycle to identify areas where improvements can be made to enhance operational efficiency and optimize working capital management. By addressing the underlying factors contributing to the prolonged cycle, the company can potentially improve its cash flow and overall financial performance.