Question

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Compute and interpret Liquidity. Solvency and Coverage Ratios Balance sheets and income statements for Lockheed Martin Corporation follow. Refer to these financial statements to answer the requirements. Income Statement Year Ended December 31 (in millions) 2005 2004 2003 Net sales Products $ 31,518 $ 30,202 $ 27.290 Service 5,695 5:324 4,534 37 213 35 526 31 824 Cost of sales Products 27,892 27,667 25,306 Service 5073 4,765 4,099 Unallocated coporate costs Воз 914 443 33,768 33,345 29,848 3.445 2,180 1.976 Other income (expenses), net (449) (121 43 Operating profit 2,996 2059 2,019 Interest expense 370 425 487 Earnings before taxes 2.626 1.654 1.552 Income tax expense BO 479 Net earnings 51.325 $ 1.266 S 1,053 Balance Sheet December 31 (in millions) 2005 2004 Assets $ 2.484 $ 1.100 Cash and cash equivalents 429 Short-term investments 4.579 4,094 Receivables 1921 Inventories 861 982 Deferred income taxes 495 552 Other current assets 10769 8.99 Total current assets 698 Property, plant and equipment, net 196 12 Investments in equity securities B407 Goodwill 560 Purchased intangibles, net 361 1000 renai pension asset 368 1864 3924 392 6 e

Answer 1

a) Current ratio = Current assets/ current liabilities

Quick ratio = Current assets - Inventory / Current liabilities

2005 Current ratio = $10,769 / $9428 = 1.14

2004 Current ratio = $8993 / $8566 = 1.05

2005 Quick ratio = $10769 - 1921 / $9428 = 0.94

2004 Quick ratio = $8993 - $1864 /$8566 = 0.83

Both the Current ratio and Quick ratio have increased from 2004 to 2005. The company is fairly liquid.

b) 2005 total liabilities to equity = 20117 / 7867 = 2.56

2004 total liabilities to equity = 18573 / 7021 = 2.65

2005 total debt to equity = 6782 / 7867 = 0.86

2004 total debt to equity = 6950 / 7021 = 1

Both total liabilities to equity and total debt to equity have decreased from 2004 to 2005. The difference between these two measures reveals that any solvency concerns would be for the short run.

c) 2005 times interest earned = 2996 / 370 = 8.1

2004 times interest earned = 2059 / 425 = 4.84

2005 cash from operations to total debt = 3194 / 6782 = 0.47

2004 cash from operations to total debt = 2924 / 6950 = 0.42