A Deep Dive Into 3D Systems, Part 5: Liquidity Ratios

The most in-depth free report on 3D Systems ever.

Jun 18, 2014 at 1:45PM

3D Systems (NYSE:DDD) shares are down about 50% since reaching their all-time high at the beginning of the year. Our first impulse is to see whether something has gone horribly wrong. In this deep dive, we're looking at several aspects to see where the problem might be. Today, we're looking at liquidity ratios. How fast can the company raise cash if it has to? Does the recent secondary offering have anything to do with this? Read on to find out.

Why conduct a ratio analysis?
Ratios give an investor a cleaner sense of what's going on with a company, especially compared with the sometimes confusing financial statements. You can use them to spot trends and see if things are going well or poorly. Plus, you can use them to compare the company with its peers at a given point in time, and over time. Doing this lets us spot disturbing trends (like the decay in the cash conversion cycle I noted last time, an indicator of worsening operating efficiency) in time to do something.

Finally, always use ratios as part of a larger analysis rather than taking them in isolation. A single ratio, such as P/E, has meaning only when compared with other metrics and other companies. This is why investing in Amazon.com at a P/E of around 500 might not be as ridiculous as the surface number first might lead you to think.

Liquidity ratios
As I wrote, these ratios measure how quickly companies can lay their hands on cash and how well they can handle a temporary cash crunch.

There are three: the current ratio, the quick ratio, and the cash ratio. These look at the amount of cash (plus almost-cash) there is sloshing around inside the business, which it can use to meet its immediate obligations. Up to a point, more is generally better. For all these ratios, a higher number means it is more likely to have the resources to meet its obligations.

  • Current ratio = current assets / current liabilities
  • Quick ratio = (cash + short-term marketable investments + accounts receivable) / current liabilities
  • Cash ratio = (cash + short-term marketable investments) / current liabilities

The current ratio looks at how well balanced working capital is. Working capital (the money currently tied up in the day-to-day operation of the business) is current assets minus current liabilities. The assets include things like cash, inventory, and accounts receivable, or A/R, while the liabilities include items like short-term debt, unearned revenue, and accrued expenses such as salary payable.

The quick ratio looks at how well the more liquid resources (cash and assets that can be pretty quickly converted into cash) can be used to pay off all current liabilities if it came down to it. This number will always be smaller than the current ratio.

The cash ratio is similar to the quick ratio but is even more restrictive because it doesn't include A/R. It's a measure of how much immediate cash a company has and is similar to looking at the balances in your checking, savings, and brokerage accounts versus all the bills you currently have due within a year. When compared against the quick ratio, it gives a handle on how much the company might be relying upon A/R as a source of cash. Remember, it takes longer to get customers to pay invoices than it does to cash out investments, so relying heavily on A/R as a cash source is probably not a good sign.

What I looked at and found
Again, I'm comparing 3D Systems with two other 3D printing companies -- Stratasys (NASDAQ:SSYS) and ExOne (NASDAQ:XONE) -- and with Cisco Systems (NASDAQ:CSCO), a well-established high-tech company. ExOne has limited information.


Source: S&P Capital IQ and author calculation.

3D Systems has plenty of liquid resources to handle its needs, as does Stratasys (and Cisco), but that's a newer development, as you can see by the big jump in all the graphs in 2011. Back in 2009 and 2010, 3D Systems was running much closer to the edge. The reason for the major improvement to these ratios since 2010 is issuance of debt (in 2011) and a good-sized issuance of stock in each year from 2011 through 2013, resulting in much higher cash balances today than in 2009 and 2010. It's not generating the cash internally, as cash flow from operations has trailed net income for two of those three years.

In addition, it is relying more heavily in general than Stratasys on accounts receivable as a source of cash (lower cash / quick percentages). Stratasys did for a couple of years, but it seems to have brought that back up. Cisco is very consistently high here.

ExOne is the company in trouble by this look. However, remember it raised a ton of cash when it went public last year.

As far as the numbers themselves go, I don't see a real problem for 3D Systems. It has enough cash to satisfy a liquidity crunch if it had to. The source of the cash, though, is a bit more problematic. For instance, it just announced a secondary offering of shares to raise cash. But that's not the best thing it should be doing.

Ultimately, the company needs to generate cash, not raise it from issuing debt or equity. As I mentioned, over two of the past three years, cash flow from operations, or CFFO, has trailed net income. This appears related to the company's starting its acquisition spree a few years ago, as going further back in time, CFFO outpaced net income regularly. Note that this also ties into the increase in the company's cash conversion cycle mentioned earlier.

Next, we'll look at solvency ratios, to see whether there's any near-term risk that 3D Systems will go bankrupt.

Readers can find each article in the series by clicking here.  

Leaked: Apple's next smart device (warning -- it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee that its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are even claiming that its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts that 485 million of these devices will be sold per year. But one small company makes this gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and to see Apple's newest smart gizmo, just click here!


Jim Mueller owns shares of Amazon.com and Apple and has options on Apple. The Motley Fool recommends 3D Systems, Amazon.com, Apple, Cisco Systems, ExOne, and Stratasys and owns shares of 3D Systems, Amazon.com, Apple, ExOne, and Stratasys. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information