Question

P4-29. Compute and Interpret Liquidity, Solvency, and Coverage Ratios Information from the balance sheet, income statement, and statement of cash flows for Lockheed Martin Corporation follow. Refer to these financial statements to answer the requirements. 2016 2015 $40,365 6,883 $34,868 5,668 40,536 47,248 (36,616) (6,040) (31,091) (4,824) (82) LOCKHEED MARTIN CORPORATION Consolidated Statements of Earnings Year Ended December 31 (in millions) Net sales Products.. Services .... Total net sales ........ Cost of sales Products ..... Services Severance charges.. Other unallocated, net ... Total cost of sales. Gross profit. ... Other income, net....... Operating profit ...... Interest expense........ Other non-operating income, net. Earnings from continuing operations before Income taxes.. Income tax expense...... Net earnings from continuing operations...... Net (loss) earnings from discontinued operations .. Net earnings ... (80) 550 (47 (42,186) 5,062 487 (36,044) 4,492 220 4.712 (443) 30 5.549 (663) 4,886 (1.133) 3,753 1,549 4.299 (1,173) 3,126 479 $5102 $ 3,605

Answer 1

1. Liquidity Ratio :- Liquidity Ratio measures the ability of a company to pay its current debts with raising any further capital.

The common liquidity ratio's are i) Current Ratio ii) Quick Ration

Current Ratio : - Current ratio measures the company's ability to pay its current liabilities . Formula for calculating current ration is Current Assets/Current liabilities.

Hence , Current ratio for 2015 is = $14,573/$13,918 =1.05

Current ratio for 2016 = $15,108/$12,542=1.20

Quick Ratio : Quick ratio measures that company's ability meets its short term obligation with its most liquid asset . Hence here liquid assets to be consider as (Current Asset - Inventory) as inventory will not liquid in very short period.

Formula for Ratio = (Current Assets - Inventory)/Current Liabilities

Hence , Quick Ratio for 2015 = ($14,573 -$4,819)/$13,918 =0.70

Quick Ratio for 2016 = ($15,108-$4,670)/$12,542 =0.83

2. Solvency Ratio :-

Solvency Ratio are those ratio which are calculated to judge the financial position of a company whether the company able to meet the long term commitment or not.

Common solvency ratio are

I) Long term debt to equity

ii) Total Debt to Equity

iii) Debt Ratio

iv) Financial leverage

v) Proprietary Ratio

i) Formula for long term debt to equity = Long term Debts/Total Equity

Hence long term debt to equity for 2015 = $14,305/$3,097 = 4.62

long term debt to equity for 2015 = $13,855/$1,606 = 8.62

ii) Total Debt to Equity = Total Debt/total Equity , Here Total Debt = Total liabilities excluding share holder equity

For 2015 = $46,207/$3,907=11.83

For 2016 =$46,200/$1,606 = 28.77

iii) Debt Ratio = Total Debt/Total Assets

For 2015 = $46,207/$49,304 =0.94

For 2016 =$46,200/$47,808=0.97

iv) Financial Leverage = Total Assets /Total Equity

for 2015 = $49,304/$3,907=12.62

For 2016 =$47,808/$1606=29.77

v) Proprietary Ratio = Total Equity/Total Assets

For 2015 = $3907/$49,304 =0.08

For 2016 = $1606/$47,808 =0.03

Coverage Ratio :- Its measure the ability to separate companies healthy amount of debt from those that are overextend is one of the important skill an investor can develop. Most of business use debt to help finance operations. Coverage ratio are useful way to help gauge such risk.

Common Coverage ratio's are

i) Interest Coverage Ratio

Formula = Earning before tax /Interest Expenses

Hence For 2015 = $3605/$443=8.14

For 2016 = $5302/$663=8.45

ii) Asset coverage ratio

Formula = (Total Assets -Intangible Assets )-(Current liabilities)/Total Debt Outstanding

For 2015 = ($49,304-$14,857)-$13918)/$46,207 = 0.44

For 2016 =($47,806-$14,717)-$12,542/$46,200=0.76

Here intangible assets consider= Goodwill + Tangible asset

and Debt Total Outstanding = Total Liabilities other than shareholders equity.