Illinois Tool Works Inc. (NYSE:ITW)

The financial ratios and periods analyzed reveal a range of insights regarding operational efficiency and working capital management over the time span from March 2018 through December 2021.

Inventory turnover

This ratio exhibited a gradual increase from 6.36 in March 2018, peaking at 7.03 in December 2019, indicating improved efficiency in managing inventory. However, a declining trend followed, dropping to 5.01 by December 2021. Correspondingly, the average inventory processing period slightly fluctuated but showed an overall increase from 57 days to 73 days during the same interval, which aligns with the decrease in turnover ratio, suggesting slower inventory movement in the later periods.

Receivables turnover

The receivables turnover ratio showed moderate fluctuations, initially increasing from 5.08 to 5.73 between 2018 and the end of 2019. Afterward, the ratio oscillated around 5 to 5.22 without a clear trend, indicating relatively stable collections. The average receivable collection period moved inversely, decreasing from 72 days to 64 days by December 2019, then extending again to around 70-75 days from March 2020 onward, signaling some variability in collection efficiency.

Payables turnover

Payables turnover ratio increased steadily from 12.96 in early 2018 to 18.64 in mid-2020, illustrating a trend toward faster payment to suppliers. Subsequent quarters saw a decline to around 14.5, indicating some loosening in payment speed. The average payables payment period correspondingly shortened from 28 days to roughly 20 days at mid-2020, before lengthening slightly to the mid-20s days by the end of 2021, further highlighting changing payment practices.

Working capital turnover

The working capital turnover ratio showed variability, increasing sharply to 6.89 in early 2019 but then sharply declining to a low range between 3.2 and 4.0 from late 2019 through most of 2020. A recovery trend occurred in 2021, culminating at 4.98 in December 2021. This pattern suggests fluctuations in how effectively working capital was leveraged to generate sales, with a notable dip in efficiency in recent years followed by gradual improvement.

Operating cycle

The operating cycle, combining inventory processing and receivables collection periods, shortened from 129 days in early 2018 to a low of 116 days by the end of 2019, reflecting improved operational efficiency. In contrast, it lengthened again after 2019, reaching 145 days by December 2021, indicating slower turnover and potentially less efficient cash flow management.

Cash conversion cycle

The cash conversion cycle remained relatively stable around 99 to 103 days for most of the earlier periods, then progressively increased to 120 days by the end of 2021. This lengthening cycle denotes increased delays in converting resource inputs into cash flows, driven by extended inventory holding and collection periods, only partially offset by payables payment practices.

Overall, the data indicate that operational efficiencies related to inventory and receivables improved until the end of 2019 but subsequently deteriorated, with inventory turnover slowing and collection periods lengthening. Payables management showed an initial trend toward quicker payments but then moderated. The working capital turnover and cash conversion cycle trends highlight increasing challenges in capital deployment and liquidity cycle duration in the most recent periods observed.

The financial data reveals several noteworthy trends in the cost of revenue, inventories, and inventory turnover ratios over the analyzed quarters.

Cost of revenue

The cost of revenue showed a generally stable pattern in 2018 and 2019, fluctuating modestly between approximately 2,000 and 2,200 million US dollars. In the first quarter of 2020, there was a visible decline to around 1,871 million US dollars, reaching a low point of 1,594 million US dollars in the second quarter of 2020. This drop could be indicative of reduced production or sales activities during that period. From the third quarter of 2020 onward, the cost of revenue gradually increased, approaching pre-2020 levels by the end of 2021, reaching 2,191 million US dollars in the last quarter.

Inventories

Inventory levels remained relatively steady throughout 2018 and 2019, generally ranging between 1,164 and 1,346 million US dollars. Beginning in early 2020, inventories showed a gradual upward trend, increasing from around 1,185 million US dollars in the first quarter to 1,694 million US dollars by the last quarter of 2021. This growth may suggest an accumulation of stock possibly in anticipation of higher demand or as a response to supply chain fluctuations.

Inventory turnover ratio

The inventory turnover ratio was relatively stable through 2018 and 2019, with values usually above 6.0, peaking at approximately 7.03 in the fourth quarter of 2019. However, from 2020 onwards, a declining trend emerges, with the ratio dropping from 6.75 in the first quarter of 2020 to 5.01 by the last quarter of 2021. This decline indicates a slower pace of inventory movement or sales relative to inventory stock, which aligns with the increasing inventory levels observed during the same period.

The analysis of financial data over the given periods reveals several trends with regard to operating revenue, trade receivables, and receivables turnover.

Operating Revenue

Operating revenue exhibited moderate fluctuations throughout the observed quarters. Initially, there was a slight increase from US$3,744 million in March 2018 to US$3,831 million in June 2018, followed by a gradual decline towards the end of 2018, falling to US$3,469 million by December 2019. The downward trend became more pronounced in early 2020, with revenue reaching a low of US$2,564 million in June 2020, likely reflecting a significant contraction during this period. However, a recovery began in the latter half of 2020, with operating revenue rising steadily to US$3,679 million by December 2021, approaching levels close to or surpassing those observed prior to the decline.

Trade Receivables

Trade receivables generally followed a similar pattern to operating revenue, decreasing from US$2,874 million in March 2018 to a low of US$2,156 million in June 2020. This decline persisted in the first half of 2020, suggesting tighter credit management or reduced sales volume contributing to lower receivables. Subsequently, trade receivables increased progressively through 2021, reaching US$2,840 million in December 2021. The recovery in receivables aligns with the observed increase in operating revenue, indicating a consistent relationship between sales activity and outstanding receivables.

Receivables Turnover Ratio

The receivables turnover ratio fluctuated within a relatively narrow range across the quarters. Starting at 5.08 in March 2018, the ratio increased gradually to a peak of 5.91 in June 2020, coinciding with the lowest revenue and receivables figures. This increase indicates improved efficiency in collecting receivables during periods of lower sales. Following this peak, the ratio declined to approximately 5.02 by December 2020, rising again slightly in 2021 to levels around 5.09. Overall, the turnover ratio reflects generally stable collection efficiency, with minor variations corresponding to changes in revenue and receivables levels.

In summary, the data indicates that the company experienced a downturn in revenue and receivables in the first half of 2020, followed by a recovery through 2021. Receivables turnover remained relatively stable, with temporary improvements in collection efficiency during the period of lower sales. These trends suggest adaptive credit and collection management in response to fluctuating operating conditions.

The analysis of the quarterly financial metrics reveals several key trends related to the cost of revenue, accounts payable, and payables turnover ratio over the examined periods.

Cost of Revenue

The cost of revenue exhibited moderate fluctuations throughout the quarters. Starting at 2181 million USD in the first quarter of 2018, it experienced a slight decline towards the end of that year, maintaining values near 2096 million USD. In 2019, the cost remained relatively stable around the 2000 to 2100 million USD range, before a noticeable decrease occurred in early 2020, dropping to a low of approximately 1594 million USD in the second quarter. This decline coincides with the onset of the global economic disruptions in 2020. Following this trough, the cost gradually increased each quarter, reaching 2191 million USD by the fourth quarter of 2021, slightly surpassing the initial levels observed in 2018.

Accounts Payable

Accounts payable values demonstrated a downward trend from 655 million USD in the first quarter of 2018 to a low of 402 million USD in the second quarter of 2020. This decline suggests a reduction in outstanding obligations or potentially more efficient payments to suppliers during this period. After the mid-2020 trough, accounts payable increased progressively, culminating at 585 million USD by the end of 2021. Despite this rebound, the year-end 2021 levels remained below those seen at the start of the analyzed timeframe.

Payables Turnover Ratio

The payables turnover ratio, indicating how quickly payables are settled, showed an overall increasing trend from 12.96 in the first quarter of 2018 to a peak of 18.64 in the second quarter of 2020. This rise reflects a quicker payment cycle during the period, especially pronounced around the early 2020 quarters. However, subsequent quarters showed a decline in turnover, reaching levels around 13 to 15 in the 2021 quarters. The elevated turnover in early 2020 suggests a strategic acceleration in settling payables likely tied to liquidity management during economic uncertainty, with normalization observed as conditions stabilized.

Overall, the cost of revenue and accounts payable exhibit a synchronized dip during the early phase of 2020, accompanied by a significant increase in payables turnover, indicating stronger cash flow control practices. The return toward historical norms in late 2021 suggests a recovery phase with stabilization of operational and financial activities.

Working Capital

The working capital exhibited variability over the analyzed periods. Initially, there was a declining trend from 3,498 million USD at the end of Q1 2018 to 2,236 million USD by Q4 2018. Subsequently, working capital increased notably in the first three quarters of 2019, peaking at 4,101 million USD in Q2 2019, then remained relatively stable around 4,000 million USD through Q4 2019. In 2020, a decline was observed in Q1 and Q2, but figures rebounded towards the end of the year and into early 2021. The last quarter of 2021 showed a decrease to 2,904 million USD, the lowest point in the observed timeframe since late 2018.

Operating Revenue

Operating revenue showed fluctuation with a generally sideways to slightly downward movement. Revenue started at approximately 3,744 million USD in Q1 2018, maintaining levels around 3,500 to 3,800 million USD through 2018 and early 2019. A significant decrease appeared starting Q1 2020, likely influenced by external market conditions, reaching a trough around 2,564 million USD in Q2 2020. Following this dip, operating revenue recovered steadily, returning to pre-2020 levels by the end of 2020 and sustaining around 3,500 to 3,600 million USD throughout 2021.

Working Capital Turnover

The working capital turnover ratio demonstrates efficiency in utilizing working capital to generate revenue. Early in the period, from Q1 2018 through Q1 2019, the ratio was relatively high, peaking at 6.89 in Q1 2019, indicating efficient utilization. However, a notable decline occurred starting Q2 2019, with the ratio falling to around 3.5 and remaining roughly within the range of 3.2 to 4.0 through 2020 and 2021. Towards the end of 2021, an upward trend was apparent, with the ratio increasing to nearly 5.0 in Q4 2021, suggestive of improved operational efficiency or changes in working capital management.

Overall Trends and Insights

The data indicate that working capital and operating revenue do not move in parallel. While revenue experienced an external shock and recovery around 2020, working capital demonstrated a more volatile pattern with peaks and troughs not directly coinciding with revenue fluctuations. The working capital turnover ratio followed revenue performance initially but decreased markedly during 2019 and 2020, implying a decline in the efficiency with which working capital was converted to sales during this period. The partial recovery in turnover ratio by end-2021 suggests a strengthening in operational performance or adjustments in asset management.

The analysis of the inventory-related financial metrics over the observed periods reveals notable trends impacting operational efficiency.

Inventory Turnover Ratio

The inventory turnover ratio exhibits a general upward trend from early 2018 through the end of 2019, increasing from 6.36 to a peak of 7.03, indicating an improvement in the frequency of inventory sales and replenishments. This suggests enhanced inventory management and potentially stronger sales activity during this period. However, starting in the first quarter of 2020, the ratio begins to decline steadily, reaching 5.01 by the fourth quarter of 2021. This decline signals a reduction in the speed at which inventory is sold and replaced, which may point to challenges in inventory management, slower sales, or an accumulation of stock.

Average Inventory Processing Period

The average inventory processing period inversely mirrors the turnover ratio trend. It remains relatively stable around 55-58 days from early 2018 until late 2019, reflecting efficient inventory processing. Beginning in 2020, this period lengthens progressively, extending from 54 days in the first quarter of 2020 to 73 days by the end of 2021. This increasing duration indicates that inventory is remaining in stock longer, which could be due to decreased demand, supply chain disruptions, or less efficient inventory control.

In summary, the earlier periods demonstrate effective inventory management with frequent turnover and shorter holding periods. The subsequent decline in turnover ratio and the concurrent increase in inventory processing days from 2020 onward suggest emerging challenges that have led to slower inventory movement and longer holding times, potentially impacting liquidity and operational efficiency.

Receivables Turnover Ratio

The receivables turnover ratio exhibited a moderate upward trend from early 2018 through the end of 2019, increasing from 5.08 to 5.73. This suggests improving efficiency in collecting receivables during that period. However, in 2020, the ratio declined noticeably, dropping to 5.02 by year-end, indicating a slower turnover. In 2021, there was a slight recovery, with the ratio rising gradually to 5.22 in the third quarter before settling at 5.09 in the final quarter.

Average Receivable Collection Period

The average collection period inversely mirrored the turnover ratio trends. Initially, it decreased from 72 days in the first quarter of 2018 to 64 days by the end of 2019, reflecting faster collections. In 2020, the trend reversed, with the collection period increasing to 73 days in the fourth quarter, indicating delays in collecting receivables. This longer collection timeframe slightly improved in 2021, oscillating between 70 and 75 days but remaining higher than the end of 2019 levels.

Overall Analysis

Between 2018 and 2019, the company improved receivables management, efficiently turning over receivables more frequently and reducing the collection days. The downturn in 2020 likely reflects challenges in collections, possibly due to external economic conditions impacting payment behaviors. Although some recovery in receivables turnover and collection periods appeared in 2021, the metrics did not fully return to the more favorable levels observed before 2020, suggesting ongoing cautiousness or operational challenges in receivables management.

Average Inventory Processing Period

The average inventory processing period demonstrated a general upward trend over the observed quarters. Starting at 57 days in the first quarter of 2018, it experienced minor fluctuations around the mid-50s before a more consistent rise began in 2021, culminating at 73 days by the last quarter of 2021. This suggests a lengthening time for inventory turnover, potentially indicating slower inventory movement or changes in inventory management efficiency.

Average Receivable Collection Period

The average receivable collection period showed relative stability with some variability throughout the period. It started at 72 days in early 2018, declined slightly to mid-60s during 2018 and 2019, briefly increased to the low 70s in late 2020 and early 2021, and ended at 72 days by the fourth quarter of 2021. This pattern implies that the company maintained a fairly consistent credit collection policy, with some short-term increases in days outstanding in 2020 and early 2021.

Operating Cycle

The operating cycle mirrored the trends observed in inventory processing and receivable collection periods, beginning at 129 days in early 2018 and decreasing gradually until reaching a low of 116 days in the fourth quarter of 2019. Subsequently, it trended upward again, rising notably in 2021 to reach 145 days by the end of that year. The extension of the operating cycle suggests an overall lengthening in the time taken from inventory acquisition through to cash collection, indicating possible operational inefficiencies or market conditions affecting turnover timing.

Overall Insights

The data reveals that the company experienced increased operational durations over the observed period, particularly in 2021. The lengthening of both inventory processing and overall operating cycle may point to inventory build-ups or slower sales, while the relatively stable receivable collection period indicates credit terms or collection processes remained largely unchanged. These trends could impact working capital requirements and cash flow management, suggesting a need for focused attention on inventory management and sales efficiency.

Payables Turnover Trend

The payables turnover ratio exhibited a generally increasing trend from the first quarter of 2018 through the end of 2019, rising from 12.96 to a peak of 17.35. This suggests an improvement in the frequency with which the company paid off its suppliers during this period. However, starting in early 2020, there was more variability, with a notable increase to 18.64 in the second quarter of 2020, followed by a significant decline to 13.81 by the fourth quarter of 2020. In 2021, the ratio showed a modest recovery, fluctuating between 12.81 and 14.69, indicating a partial stabilization but at a lower level compared to 2019.

Average Payables Payment Period Trend

The average payables payment period decreased steadily from 28 days in the first quarter of 2018 to 21 days by the end of 2019, reflecting a quicker payment cycle to suppliers. A marked change occurred in 2020 when the payment period increased notably to 26 days in the third and fourth quarters, coinciding with the period of economic disruption during that year. In 2021, the payment period remained relatively stable between 25 and 29 days, indicating that the company maintained a longer payment duration compared to the pre-2020 period.

Relationship Between Metrics

The inverse relationship observed between payables turnover and the average payables payment period aligns with expected financial behavior: as the turnover ratio increases, the payment period decreases, and vice versa. This pattern was consistent until 2019, after which the trends reflected more volatility, likely influenced by external factors impacting payment practices.

Overall Insights

The data indicates that the company improved its payables management efficiency through 2019, suggesting strong liquidity and supplier relationship management. The fluctuations and extended payment periods beginning in 2020 may reflect adjustments to cash flow management in response to external economic pressures. Stability in 2021 points to an adaptation to the new operating environment, although payment practices have not fully returned to the prior shorter payment cycles and higher turnover rates observed before 2020.

The financial data over the observed periods reveals several notable trends in the company's operational efficiency metrics, specifically regarding inventory management, receivables, payables, and the overall cash conversion cycle.

Average Inventory Processing Period

The average inventory processing period experienced a gradual increase from 57 days at the beginning of 2018 to 73 days by the end of 2021. Although it fluctuated mildly around the mid-50s and upper 50s for much of 2018 and 2019, there was a clear upward trend starting from 2020, continuing steadily through 2021. This indicates that the company took progressively longer to process inventory over time, potentially implying increased inventory levels or slower inventory turnover.

Average Receivable Collection Period

The receivable collection period displayed moderate variability, starting at 72 days in early 2018 and showing slight reductions during late 2018 and mid-2019. However, beginning in mid-2020, this period increased again, peaking around 75 days in the third quarter of 2021 before slightly declining to 72 days by the end of 2021. This pattern suggests fluctuations in how quickly the company collected payments from customers, with a tendency towards slower collections in the later periods.

Average Payables Payment Period

The payables payment period showed a modest downward trend initially, decreasing from 28 days in early 2018 down to approximately 20-21 days by mid-2020. From that point, there was a slight upward movement, reaching around 25-29 days by late 2021. This suggests that the company initially shortened its payment terms to suppliers but gradually extended them again in the recent periods, potentially as a cash flow management strategy.

Cash Conversion Cycle

The cash conversion cycle remained relatively stable at around 100 days through 2018 and 2019 but began to extend starting in 2020. It increased from 96 days in the first quarter of 2020 to 120 days by the last quarter of 2021. This lengthening of the cash conversion cycle reflects the combined effects of longer inventory processing and receivables collection periods, outpacing any reductions in payables payment time. The extended cycle suggests that cash was tied up longer in the operating cycle, impacting liquidity.

Overall, the trends highlight a gradual deterioration in operational efficiency from an inventory and receivables perspective, with inventory processing and receivable collection periods increasing over time. Although the company initially improved its payables period, the recent partial reversal of this trend coupled with longer inventory and receivables periods has led to a noticeably extended cash conversion cycle. This development could have implications for working capital management and cash flow availability.