Module Five Activity
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Apr 3, 2024
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Module Five Activity: Working Capital
Tyesha Williams
Southern New Hampshire University
FIN 320
February 11, 2024
Suleman Braimah
Working capital measures, a company’s short-term financial health and its liquidity
throughout its operations. Fernando (2023) says "Working capital is like the checkbook for the
business; it's a measure of the short-term financial health of the company.” Computing working
capital requires two financial statements which are the balance sheet and income statement.
Furthermore, the formula for determining working capital requires the company’s current assets
and current liabilities. To determine working capital total current liabilities are subtracted from
the total current assets. The balance sheet offers a glimpse of the company’s financial stance at a
particular moment in time. Furthermore, a company can locate its current assets and liabilities as
well as shareholder’s equity in its balance sheet. The income statement does not provide specific
items needed to compute working capital; however, it offers vital information regarding the
effectiveness of operations and the company’s profitability, which affects working capital. For
example, companies that make a substantial amount of profits will have more money accessible
for use, increasing assets and hence its working capital. Having a positive working capital
implies that a company has an adequate number of assets to cover its short-term liabilities.
Conversely, having a negative working capital indicates impending liquidity challenges. Chipotle
Mexican Grill currently has a positive working capital is 590.09 million based on the increasing
amount of sales and opening of more locations. Looking at Chipotle’s balance sheet, it can be
determined that the company has a significant amount of working capital and as a result, it will
continue to have potential growth opportunities and improvement of its operations.
Efficient management of working capital is essential for a business's financial health and
operational success. Liquidity, solvency, profitability, and business continuity are important in
managing working capital. Moreover, sufficient working capital confirms that a company can
accomplish its short-term commitments, for instance, payments to suppliers, employees, and
operating expenses. Effective working capital management assists in maintaining solvency by
guaranteeing the business can meet its long-term obligations. In addition, profitability can be
improved through the management of receivables, payables, and inventory. Adequate working
capital guarantees that a company can maintain operations even in times of financial worry.
Overall, a company that has a significant amount of cash flow will be able to meet its short-term
obligations and invest in potential growth opportunities. To determine whether Chipotle Mexican Grill has enough working capital ready to
address bills to suppliers and if there will be potential cash inflow at the end of the year the use
of the third quarter numbers from the balance will be used. To compute its working capital
subtracting total current liabilities of 1087.707 million from 1669.43 million in total current
assets provides a total of 581.723 in working capital. Furthermore, the company’s liquidity is
computed by dividing total current assets by total current liabilities which gives a result of a 1.53
current ratio. This illustrates a positive working capital which implies that Chipotle Mexican
Grill Inc. has enough to readily address bills to suppliers. Furthermore, comparing 2023 third-
quarter results and 2022 third-quarter results shows a substantial amount of growth thus proving
that it will be potential cash inflow at the end of the year. The table below was a determining
factor
for
addressing
the
specific
questions.
Item
2023
2022
Current Ratio
1.53
1.32
Working capital
581.723
259.575
Debt Ratio
.64
.66
Earnings Per Share
11.39
9.26
Price Earnings Ratio
168.33
155.28
Total Asset Turnover
Ratio
.31
.33
Financial Leverage
2.74
2.93
Net Profit Margin
.13
.12
Return on Assets
.04
.04
Return on Equity
0
0
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Chipotle Mexican Grill Inc., a leading fast-casual restaurant chain, has demonstrated a
trend of efficient working capital management over the last four years. Working capital
management requires the processing of current assets and current liabilities to make certain
adequate cash flow to meet short-term operating costs and debts. Therefore, utilizing the current
ratio, and working capital allows Chipotle's working capital management trend to be analyzed.
Item
2023
2022
2021
2020
Current Ratio
1.53
1.32
1.78
1.51
Working Capital
581.723
259.575
667.642
409.563
Looking over the last four years Chipotle Mexican Grill has illustrated a trend of maintaining a
healthy current ratio, implying good liquidity. Furthermore, there was a decline in the 2022 third
quarter’s working capital possibly due to the pandemic. Overall, most of the ratios remained
stable, indicating that it can meet its short-term obligations without relying profoundly on
inventory sales. Chipotle's working capital turnover ratio has mostly been sharp, demonstrating
effective utilization of working capital.
References
Chipotle announces third quarter 2023 Results - Oct 26, 2023. (n.d.). https://ir.chipotle.com/2023-10-26-CHIPOTLE-ANNOUNCES-THIRD-QUARTER-2023-
RESULTS#:~:text=Total%20revenue%20in%20the%20third%20quarter%20was,to%20higher
%20transactions%20and%2C%20to%20a%20lesser
Fernando, J. (2023, December 19). Working Capital: Formula, components, and limitations. Investopedia. https://www.investopedia.com/terms/w/workingcapital.asp
Mergent online. (n.d.). https://www.mergentonline.com/login.php
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