J. C. Penney Company, Inc. Equity Valuation and Analysis As of ...

Current RatioCurrent Ratio4.03.53.02.52.01.5JCPKSSDDSSSISMRT1.00.50.02002 2003 2004 2005 2006YearThe current ratio is the relationship between a company’s current assets(cash, cash equivalents, short-term investments, receivables, and inventory) andthe current or short-term liabilities (short-term debt and payables). The mainfunction of this ratio is to determine a company’s ability to pay back its shorttermliabilities in a hurry, should the need arise. The higher the ratio the morelikely a company will be able to pay off its obligations. For instance, a companywith a ratio of 1:1 has $1 of current assets for every $1 of short-term liabilities,which means should there be able to pay off short-term liabilities immediately;however, this just covers the basic need. A better turnover would be involvemore assets or less liabilities.J. C. Penney typically maintains a current ratio of 2:1, which means that J.C. Penney is unlikely to default on any of its short-term liabilities. Furthermore,as you can see from the graph, some retailers have held current ratios as high as3.5:1, but most companies within this segment have converged on 2:1. Thismeans that companies in this segment of the retail industry are capable of72