Question

Selected balance sheet and income statement

($millions)	2013	2012	2011
Net sales	$3,794	$3,643	$3,085
Interest expense	59	49	54
Pretax income	644	665	547
Net income	416	439	368
Current assets	3,152	2,890	2,685
Total assets	4,631	4,159	3,736
Current liabilities	587	627	480

Required

1. Compute the current ratio for each year and discuss any trends.  Do you feel that the company is sufficiently liquid?  Explain.  What additional information might be helpful in analyzing the liquidity?
2. Compute times interest earned for each year and discuss any trends.  Do you have any concerns about its level of financial leverage and its ability to meet interest obligations?  Explain.

Answer 1

1. Current Ratio = Current Assets / Current Liabilites

In 2011

Current Ratio            =           2685/ 480                        
                                    =            5.59375

In 2012                      

Current Ratio            =           2890/ 627                        
                                    =            4.61

In 2013

Current Ratio            =           3152/ 587                        
                                    =            5.37

In 2011, the company's current assets exceeded its current liabilities by 5.59 times. In 2012, the company's current assets exceeded its current liabilities by 4.62 times and In 2013, the company's current assets exceeded its current liabilities by 5.37 times, Hence in 2011 & 2013 the company has the ability to use it current assets (resources) to pay for its short-term debt (current liabilities) but in 2012 current ratio is lower than 2011 & 2013, therefore; the company is less capable to use it current assets (resources) to pay for its short-term debt as compare to other years.

the company reduced its liquidity position from 2011 to 2012, as indicated in metrics. The current ratio positions is not improved. But the company improved its liquidity position from 2012 to 2013, as indicated in metrics. The current ratio positions is improved.

If we have information of inventory than we can calculate quick ration and analysis that the company has to sell inventory to meet its current debt obligations.

2. Time Interest Earned Ratio         =    Income Before Interest and tax (EBIT) / Interest Expense

In 2011

Time Interest Earned Ratio                 =            547 / 54

                                                                 =            10.13

In 2012

Time Interest Earned Ratio                 =            665 / 49

                                                                 =            13.57

In 2013

Time Interest Earned Ratio                 =            644 / 59

                                                                 =            10.92

In 2012, Company is better at paying off its interest expense as indicated by its times interest earned ratio of 13.57 (as compared to 10.13 in 2011 and 10.92 in 2013), which means that the Company can bear an interest expense 13.57 times its current interest expense.