Question

Assigning a Long-Term Debt Rating Using Financial Ratios

Refer to the information below from Nordstrom Inc.’s 2016 financial statements. Use the information to answer the requirements ($ millions).

Sales					$14,095
Depreciation expense					560
Tax expense					376
Interest expense, gross					153
Earnings from continuing operations (Net income)					600
EBITA					1,117
Cash					595
Average total assets					8,472
Total debt					2,805
Noncurrent deferred tax liabilities					324
Noncontrolling interest					0
Equity					871
Dividends paid					1,185
Cash from operating activities					2,451

a. Compute the following seven Moody’s metrics for Nordstrom. See Appendix 4A for definitions.

Round answers to one decimal place (example for percentage answers: 0.2345 = 23.5%).

Ratio			2016
EBITA to average assets
Operating margin
EBITA margin
EBITA interest coverage
Debt to EBITDA
Debt to book capitalization
Retained cash flow to net debt

b. Use your computations from part a, along with measures in Exhibit 4.7, to estimate the long-term debt rating for Nordstrom.

Based on the above computations, the rating for Nordstrom's long-term debt would fall in the?

Answer 1

a	Ratio	2016	Workings
	EBITA to average assets	13.2%	= 1256/9470
	Operating margin	6.9%	= (685+394)/15093
	EBITA margin	7.9%	= 1256/15093
	EBITA interest coverage	7.3	= 1256/171
	Debt to EBITDA	1.7	= 2908/(1256+578)
	Debt to book capitalization	70.1%	= 2908/(391+2908+871)
	Retained cash flow to net debt	39.7%	= (2451-1185-171)/2908
b	Based on the above computations, the rating for Nordstrom's long-term debt would fall in the A - Baa range