Watsco Inc (WSO)

Watsco Inc's liquidity ratios indicate the company's ability to meet its short-term obligations. The current ratio, which compares current assets to current liabilities, has seen a slight decline from 3.00 in 2020 to 2.70 in 2021 and further to 2.54 in 2022, but then improved significantly to 3.36 in 2023 and slightly decreased to 3.13 in 2024. This suggests that Watsco Inc may have had some challenges in the short-term in 2021 and 2022 but managed to strengthen its liquidity position in 2023, albeit showing a minor decline in 2024.

The quick ratio, also known as the acid-test ratio, provides a more stringent measure of liquidity by excluding inventory from current assets. Watsco Inc's quick ratio has been low and inconsistent over the years, starting at 0.49 in 2020, dropping significantly to 0.16 in 2021 and remaining the same in 2022, before increasing to 0.30 in 2023 and spiking to 0.79 in 2024. While the quick ratio has shown improvement since 2021, the low levels in previous years indicate potential difficulties in quickly covering short-term obligations without relying on inventory sales.

The cash ratio, representing the proportion of cash and cash equivalents to current liabilities, mirrors the trends observed in the quick ratio for Watsco Inc. The company's cash ratio was 0.49 in 2020, experienced a sharp decline to 0.16 in 2021 and remained constant in 2022, before climbing to 0.30 in 2023 and significantly rising to 0.79 in 2024. This indicates that Watsco Inc had relatively low cash reserves compared to its short-term obligations in 2021 and 2022 but substantially improved its cash position in 2023 and maintained a strong liquidity cushion in 2024.

Overall, while Watsco Inc's liquidity ratios have shown some fluctuations, the company appears to have strengthened its liquidity position in recent years, as evidenced by the improved current ratio, quick ratio, and cash ratio in 2023 and 2024. However, continuous monitoring of these liquidity metrics is essential to ensure the company can effectively meet its short-term financial commitments.

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Additional liquidity measure

The cash conversion cycle of Watsco Inc has shown an increasing trend over the past five years, starting at 75.61 days as of December 31, 2020, and reaching 90.73 days by December 31, 2024. This indicates that the company is taking longer to convert its investments in inventory into cash.

A higher cash conversion cycle implies that Watsco Inc is taking longer to sell its inventory, collect receivables, and pay off its payables. This may potentially indicate inefficiencies in inventory management or slower collection of accounts receivable, which could tie up cash and impact liquidity.

The company should closely monitor and potentially streamline its working capital management processes to improve its cash conversion cycle and ensure efficient use of its resources. A prolonged cash conversion cycle can also impact the company's ability to fund its operations and investments effectively in the long run.