A company’s liquidity is often one of the most discussed topics. That’s because the life or death of a company is closely related to its liquidity. That said, liquidity is not the same as profitability. A company can still be profitable while it’s facing some kind of cash flow problem.
The same can be said for Beyond Meat. The company has been one of my favorites and it has also been on my radar for quite some time. However, it has been trading at a very high market valuation and the stock price has still not been in my buy zone yet.
Nonetheless, Beyond Meat is one of the most innovative food companies on earth and possibly the fastest growing too.
In this article, we will talk about Beyond Meat’s liquidity from the perspective of 3 ratios. These ratios are current ratio, working capital and quick ratio.
Without further delay, let’s get started!
Beyond Meat’s Current Ratio
The chart above shows Beyond Meat’s current ratio for the past few quarters from 2019 to 2020.
Current ratio is derived from the following equation:
Current ratio = Total current assets / Total current liabilities
The current ratio is one of the most used metrics when it comes to measuring a company’s short-term liquidity. From the equation, the ratio compares a company’s existing current assets with its current liabilities that will be due in the next 12 months or 1 year. As such, the current ratio measures the ability of a company to cover its short-term liabilities.
In the chart above, Beyond Meat’s current ratio from 2019 to 2020 achieved a minimum figure of 5.0 in all financial periods, suggesting that the company had enough short-term liquidity to deal with the coming liabilities.
In fact, Beyond Meat’s short-term liquidity was multiple times higher than its current liabilities, indicating that the company had a reserve of liquid assets that could cover the liabilities multiple times for the next 12 months.
As of 2Q 2020, Beyond Meat should not have any near-term liquidity issue within the next 12 months considering that its current ratio was more than 6.0.
Beyond Meat’s Quick Ratio
To measure Beyond Meat’s liquidity under the most extreme condition, we can use the quick ratio or acid test ratio which is shown in the chart above.
The formula for calculating the quick ratio is the same as the one used for the current ratio, except that the portion of the current assets for the quick ratio uses only highly liquid assets such as cash or near-cash assets.
In Beyond Meat’s case, highly liquid assets are cash and cash equivalents as well as accounts receivable. Other current assets that are not so liquid such as inventories and prepaid expenses are excluded in the quick ratio or acid test ratio calculation.
As such, the quick ratio measures Beyond Meat’s short-term liquidity under the most extreme condition when only highly liquid assets are considered to cover the short-term liabilities which will be due in the next 12 months or 1 year.
According to the chart above, Beyond Meat had enough highly liquid assets to pay for the liabilities in the next 12 months as reflected in the positive quick ratio or acid test ratio.
From 2019 to 2020, Beyond Meat’s had a quick ratio of at least 4.0, suggesting that the company’s highly liquid assets such as cash and near-cash assets had been sufficient to cover the short-term liabilities.
As of Q2 2020, Beyond Meat should have enough liquid assets to pay for all current liabilities in the next 12 months or 1 year even under the most stressful condition when only cash and accounts receivable were considered.
In fact, Beyond Meat’s quick ratio of 4.0 in 2Q 2020 indicates that the company’s ability to pay for the liabilities with only cash or near-cash assets was 4 times higher than all the debt that comes due in the next 12 months.
Beyond Meat’s Working Capital
In terms of working capital, Beyond Meat has been on a roll for the past several quarters, with the company having working capital in excess of $300 million in all quarterly financial periods and reaching as high as $360 million in 2Q 2020.
For your information, working capital is calculated by the following formula:
Working capital = Current assets – Current liabilities
Having a working capital of more than $300 million signals plenty of liquidity for Beyond Meat. The best part is that most of the working capitals are in cash or near cash forms as reflected in the quick ratio of at least 4.0 which we saw in an earlier discussion.
In summary, Beyond Meat should not have any liquidity issues in the near term, judging from the higher than average current ratio, quick ratio and working capital.
In fact, Beyond Meat’s liquidity has been mostly in highly liquid assets such as cash and cash equivalents and accounts receivable throughout most of the financial periods, suggesting that the company has no issue in covering all short-term debt even under the most extreme condition when only cash is available.
This said, Beyond Meat’s investors should be able to sleep sound upon knowing about the company’s abundant liquidity.
Nonetheless, investors still need to keep a watchful eye on the company’s cash flow such as operating and free cash flow since the company has been cash-flow negative all the while.
References and Credits
1. Financial figures in all charts and tables were obtained and referenced from BYND Annual and Quarterly Reports.
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