Question

Compute and Interpret Coverage, Liquidity and Solvency Ratios Selected balance sheet and income statement information from CVS Health Corp. for 2014 through 2016 follows ($ millions). Total Current Assets Total Current Liabilities EBIT (Operating income) Interest Expense, Gross Total Liabilities Equity 2016 $30,931 $26,250 $10,282 $1,058 $57,628 $36,723 2015 29,047 23,169 9,398 838 55,234 37,092 2014 25,872 19,027 8,743 600 36,224 37,852 a. Compute times interest earned ratio for each year and discuss any trends for each. Round answers to one decimal place. Year TIE Ratio 2016 2015 2014 Based on your computations above, select the most appropriate answer Times interest earned has steadily increased since 2014. Times interest earned has steadily decreased since 2014. Times interest earned has remained the same since 2014. Times interest earned increased in 2015 but then decreased in 2016. b. Compute the current ratio for each year and discuss any trend in liquidity. Round answers to one decimal place. Year Current Ratio 2016 2015 2014 Do you believe the company is sufficiently liquid? Explain. OCVS's current ratio has increased over the past three years and is greater than 1, indicating CVS is liquid. OCVS's current ratio has decreased over the past three years and it is currently less than 1 indicating CVS is not liquid. OCVS's current ratio has increased over the past three years, however, it remains less than 1 indicating CVS is not liquid. OCVS's current ratio has decreased over the past three years, however, it is greater than 1 indicating CVS is liquid.

Answer 1

a) Times interest earned ratio = Income before interest and tax / Interest expense Year 2016 2015 2014 Earnings before interest and tax(A)* 11,340 10,236 9,343 Interest expense(B) 1,058 838 600 TIER(A/B) 10.70 12.20 15.60 Based on above, the TIER has steadily decreased since 2014 *EBIT plus interest expense b) Current ratio = Current assets/Current liabilities at Year 2016 2015 2014 Current assets(A) 30,931 29,047 25,872 Current Liabilities(B) 26,250 23,169 19,027 Current ratio(A/B) 1.20 1.30

Based on above CVS's current ratio has decreased over the past three years, however, it is greater than 1 indicating CVS is liquid c) Total Liabilities to Equity ratio = Total liabilities/ Equity Year 2016 2015 2014 Total Liabilities (A) 57,628 55,234 36,224 Equity(B) 36,723 37,092 37,852 Total Liabilities to Equity Ratio(A/B) 1.60 1.50 1.00 Based on above, CVS's liability to equity ratio has increased since 2014, and is relatively high, concluding CVS is insolvent(assuming 1:1 standard Debt to Equity ratio) d) Based on the above ratios, CVS is a medium to high credit risk as its level of debt has increased and its current ratio and times earned ratio have decreased.