Question

Below is selected balance sheet and income statement information from Scott & Company.

(in millions)	2014	2012
Cash	$ 1,483.36	$   1,536.73
Accounts receivable	735.30	1,097.16
Current assets	2,918.33	3,913.56
Current liabilities	6,157.95	3,385.39
Long-term debt	3,611.63	17,620.81
Short-term debt	4,568.83	1,033.96
Total liabilities	26,363.17	23,218.42
Interest expense	1,338.29	1,566.90
Capital expenditures	211.50	1,545.48
Equity	-7,152.90	4,587.67
Cash from operations	185.98	110.89
Earnings before interest and taxes	1,902.84	1,594.84

a. Compute the following liquidity, solvency and coverage ratios for both years.

Current ratio (2014, 2012)

Liabilities-to-equity (2014, 2012)  

Times interest earned (2014, 2012)

Cash from operations to total debt (2014, 2012)

Free operating cash flow to total debt (2014, 2012)

b.  What is your overall assessment of the company’s credit risk? Explain. What differences do you observe between the two years? Please be brief.

Answer 1

a. Current Ratio = current assets / Current liabilities
2014 = 2,918.33 / 6,157.95 = 0.47
2012 = 3,913.56 / 3,385.39 = 1.16

  Liabilities to Equity ratio = Total Liabilities / Total Equity
2014 = 26,363.17 / -7,152.90 = - 3.69
2012 = 23,218.42 / 4,587.67 = 5.06

Times interest earned = EBIT / Interest expense
2014 = 1,902.84 / 1,338.29 = 1.42
2012 = 1,594.84 / 1,566.90 = 1.02

Cash from operation to total debt = Cash from operation / Debt
2014 = 185.98 / (3,611.63 + 4,568.83) = 0.02
2012 = 110.89 /(17,620.81 + 1,033.96) = 0.01

Free operating cash flow to total deb = (Cash from operation - Capital expenditures) / Debt
2014 = (185.98 - 211.50) / (3,611.63 + 4,568.83) = - 0.003
2012 = (110.89 - 1,545.48) /(17,620.81 + 1,033.96) = - 0.077