Chapter 5
5.12 CALCULATING AND INTERPRETING RISK RATIOS. Refer to the financial statement data for Hasbro in Problem 4.23
in Chapter 4. Exhibit 5.15 presents risk ratios for Hasbro for Year 2 and Year 3.
EXHIBIT 5.15 Risk Ratios for Hasbro (Problem 5.12)
Revenues to Cash Ratio
Days Revenues Held in Cash
Current Ratio
Quick Ratio
Operating Cash Flow to Average Current Liabilities Ratio
Days Accounts Receivable
Days Inventory
Days Accounts Payable
Net Days Working Capital
Liabilities to Assets Ratio
Liabilities to Shareholders’ Equity Ratio
Long-Term Debt to Long-Term Capital Ratio
Long-Term Debt to Shareholders’ Equity Ratio
Operating Cash Flow to Total Liabilities Ratio
Interest Coverage Ratio
Year 4
4.8
76
1.5
1.1
0.344
72
53
47
78
0.499
0.976
0.156
0.185
0.213
9.1
A. Calculate the amounts of these ratios for Year 4.
1.Revenues to Cash Ratio = ( 2998/((521+725)/2) = 4.8 time
2.Days Revenues Held in Cash = 365/4.8 = 76 days
3.Current Ratio = 1718 / 1149 = 5.1 : 1
4.Quick Ratio = (275+579)/1149 = 1.1 :1
5.Operating Cash Flow to Average Current Liabilities Ratio = 358/(930+1149) = 0.344 or 34.4%
6.Days Accounts Receivable = 2998/((607+579)/2) = 5.1 time
365/5.1=72 days
7.Days Inventory = 1252/((169+195)/2) = 6.9 times
365/6.9=53 days
8.Days Accounts Payable = (1252+195-169)/((159+168)/2) = 7.8 x 365/7.8= 47 days
9.Net Days Working Capital = 72+53-47 = 78 days
10.Liabilities to Assets Ratio = 1601/3241=0.494 or 49.4%
11.Liabilities to Shareholders’ Equity Ratio = 1601/1640 = 0.976 or 97.6%
12.Long-Term Debt to Long-Term Capital Ratio = 303/(303+1640) = 0.156 or 15.6 %
13Long-Term Debt to Shareholders’ Equity Ratio = 303/1640 = 0.185 or 18.5%
14.Operating Cash Flow to Total Liabilities Ratio = 358/((1758 +1601)/2) = 0.213 or 21.3%
15.Interest Coverage Ratio = (196+32+64)/32 9.1 times
Page 1 of 14
Year 3
6.2
59
1.6
1.2
0.479
68
51
47
72
0.556
1.251
0.328
0.489
0.245
5.6
Year 2
7.7
47
1.5
1.1
0.548
73
68
49
91
0.621
1.639
0.418
0.720
0.238
2.3
B. Assess the changes in the short-term liquidity risk of Hasbro between Year 2 and Year 4 and the level of that risk
at the end of Year 4.
1.Revenues to Cash Ratio
Risk decrease 7.7 to 4.8
2.Days Revenues Held in Cash
Co. hold cash for more
3+4 . Current Ratio & Quick Ratio
There is no significant difference , but in term of risk . the company is able to pay
more than one ) short-term risk will be low
5. Operating Cash Flow to Average Current Liabilities Ratio
The ratio decreased. Because of a decrease in cash flow. It mean more risk
current asset < current liability (
6. Days Accounts Receivable
Constant
7. Days Inventory
Constant
All liquidity suggests that the short term debt ability risk is low except for year 4 for the ratio operating cash to current
liabilities it’s below 40% Company is secure
C. Assess the changes in the long-term solvency risk of Hasbro between Year 2 and Year 4 and the level of that risk at
the end of Year 4.
10. Liabilities to Assets Ratio
Decrease risk
11.Liabilities to Shareholders’ Equity Ratio
Decrease risk
12.Long-Term Debt to Long-Term Capital
Ratio The risk is low
13.Long-Term Debt to Shareholders’ Equity Ratio Is
reduced in risk
14.Operating Cash Flow to Total Liabilities Ratio
20% reacquired rate
Year 2 0.238 more than 20%
Year 3 0.245 more than 20%
Year 4 0.21 more than 20% So,
healthy situation
15.Interest Coverage Ratio
Can be coved 9.1 time in year 4 , this indicates that company is generating
The long term solvency risk is low has decreased significantly during the 3 year period. Debt level decline as the Co. has
redeemed debt interest coverage ratio in year 4 increase to a very healthy level because of reduction in borrowing and
increase in net income
Page 2 of 14
5.14 INTERPRETING RISK RATIOS. Refer to the profitability ratios of CocaCola in Problem 4.25 in Chapter 4. Exhibit
5.17 presents risk ratios for Coca-Cola for 2006- 2008. As we did within the chapter for PepsiCo, we utilize Coca-Cola’s
footnote disclosures to extract the amount of trade accounts payable included within the line item accounts payable
and accrued expenses.
EXHIBIT 5.17 Risk Ratios for Coca-Cola
2008
6.9
53
0.9
0.6
0.578
37
71
44
64
0.495
0.979
0.120
0.136
0.364
17.0
Revenues to Cash Ratio
Days Revenues Held in Cash
Current Ratio
Quick Ratio
Operating Cash Flow to Average Current Liabilities Ratio
Days Accounts Receivable
Days Inventory
Days Accounts Payable
Net Days Working Capital
Liabilities to Assets Ratio
Liabilities to Shareholders’ Equity Ratio
Long-Term Debt to Long-Term Capital Ratio
Long-Term Debt to Shareholders’ Equity Ratio
Operating Cash Flow to Total Liabilities Ratio
Interest Coverage Ratio
2007
8.4
44
0.9
0.6
0.647
37
68
38
67
0.497
0.990
0.131
0.151
0.414
17.3
2006
6.5
56
0.9
0.6
0.636
37
68
40
65
0.435
0.771
0.072
0.078
0.456
29.9
A. Assess the changes in the short-term liquidity risk of Coca-Cola between 2006 and 2008.
Coca Cola’s short – term liquidity risk is now and did not changed significantly during the three – year period. It current
ratio is just below I , and its quick ratio is below 0.6 but has remained steady over the past three years. The operating
cash flow to current liabilities ratio been decreasing , but it remain above the desired level of 40%. This is not too
worrisome given that the firm has a demonstrated ability to sell products for considerably more than their book value .
b. Assess the changes in the long-term solvency risk of Coca-Cola between 2006 and 2008.
Coca Cola’s long – term solvency risk decreased during the three – year period. Its debt ratio generally declined
particularly its long – term debt ratio. Operating cash flow to total liabilities and interest coverage ratio decreased , but
are still above a desired level due to Coca Cola’s profitability. The level of long – term solvency risk is still low .
c. Compare the short-term liquidity ratios of Coca-Cola with those of PepsiCo discussed in the chapter. Which firm
appears to have more short-term liquidity risk? Explain.
Revenues to Cash Ratio
29.1
Days Revenues Held in Cash
Current Ratio
Quick Ratio
Operating Cash Flow to Average Current Liabilities Ratio
Days Accounts Receivable
Days Inventory
Days Accounts Payable
Net Days Working Capital
17.5
1.2
0.8
0.850
38
43
48
34
Coca Cola’s appears to have slightly more short-term risk compared to pepsi co. , but neither company has much risk
in this regard .
Page 3 of 14
D. Compare the long-term solvency ratios of Coca-Cola with those of PepsiCo discussed in the chapter. Which firm
appears to have more long-term solvency risk? Explain.
Liabilities to Assets Ratio
0.664
Liabilities to Shareholders’ Equity Ratio
1.973
Long-Term Debt to Long-Term Capital Ratio
0.394
Long-Term Debt to Shareholders’ Equity Ratio
0.649
Operating Cash Flow to Total Liabilities Ratio
0.399
Interest Coverage Ratio
22.3
Neither pepsi co. nor Coca Cola’s displays much long-term solvency risk. However , long-term solvency risk than Coca
Cola due primarily to higher proportions of long-term debt.
Page 4 of 14
5.15 COMPUTING AND INTERPRETING RISK AND BANKRUPTCY PREDICTION RATIOS FOR A FIRM THAT DECLARED
BANKRUPTCY. Delta Air Lines is one of the largest airlines in the United States. It has operated on the verge of
bankruptcy for several years. Exhibit 5.18 presents selected financial data for Delta Air Lines for each of the five years
ending December 31, 2000, to December 31, 2004. Delta Air Lines filed for bankruptcy on September 14, 2005. We
recommend that you create an Excel spreadsheet to compute the values of the ratios and the Altman’s Z-score in Parts
a and b, respectively
EXHIBIT 5.18 Financial Data for Delta Air Lines (amounts in millions except per share amounts)
Year Ended December 31:
2004
2003
2002
Sales
$15,002
$14,087
$13,866
Net Income (Loss) before Interest and Taxes
$ (3,168)
$ (432)
$ (1,337)
Interest Expense
$ 824
$ 757
$ 665
Net Income (Loss)
$(5,198)
$ (773)
$ (1,272)
Current Assets
$ 3,606
$ 4,550
$ 3,902
Total Assets
$21,801
$25,939
$24,720
Current Liabilities
$ 5,941
$ 6,157
$ 6,455
Long-Term Debt
$12,507
$11,040
$ 9,576
Total Liabilities
$27,320
$26,323
$23,563
Retained Earnings (Deficit)
$ (4,373)
$ 844
$ 1,639
Shareholders’ Equity
$ (5,519)
$ (384)
$ 1,157
Cash Flow Provided by Operations
$ (1,123)
$ 142
$ 225
Common Shares Outstanding
139.8
123.5
123.4
Market Price per Share
$ 7.48
$ 11.81
$ 12.10
2001
$13,879
$(1,365)
$ 499
$(1,216)
$ 3,567
$23,605
$ 6,403
$ 7,781
$19,581
$ 2,930
$ 4,024
$ 236
123.2
$ 29.26
2000
$15,657
$ 1,829
$ 380
$ 828
$ 3,205
$21,931
$ 5,245
$ 5,797
$16,354
$ 4,176
$ 5,577
$ 2,898
123.0
$ 50.18
2001
0.56
0.041
0.530
0.659
0.013
‫ــــــ‬
2000
0.61
‫ــــــ‬
0.746
0.510
‫ــــــ‬
4.8 time
a. Compute the value of each the following risk ratios.
(1) Current Ratio (at the end of 2000–2004)
(2) Operating Cash Flow to Current Liabilities Ratio (for 2001–2004)
(3) Liabilities to Assets Ratio (at the end of 2000–2004)
(4) Long-Term Debt to Long-Term Capital Ratio (at the end of 2000–2004)
(5) Operating Cash Flow to Total Liabilities Ratio (for 2001–2004)
(6) Interest Coverage Ratio (for 2000–2004)
Current Ratio
Operating Cash Flow to Current Liabilities Ratio
Liabilities to Assets Ratio
Long-Term Debt to Long-Term Capital Ratio
Operating Cash Flow to Total Liabilities Ratio
Interest Coverage Ratio
2004
0.61 : 1
(0.168)
1.253
1.79
(0.042)
‫ــــــ‬
Interest Coverage Ratio
2004 – 2001 net was negative so interest coverage ratio can’t cover
Page 5 of 14
2003
0.74
0.023
1.015
1.36
0.006
‫ــــــ‬
2002
0.60
0.035
0.953
0.892
0.010
‫ــــــ‬
STARBUCKS
Exhibit presents risk ratios for Starbucks for 2006 and 2007. Exhibits and in Chapter 1 present the financial statements for
Starbucks.
Risk Ratios for Starbucks
(Integrative Case 5.1)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Revenues to Cash Ratio
Days Revenues Held in Cash
Current Ratio
Quick Ratio
Operating Cash Flow to Average Current Liabilities Ratio
Days Accounts Receivable
Days Inventory
Days Accounts Payable
Net Days Working Capital
Liabilities to Assets Ratio
Liabilities to Shareholders’ Equity Ratio
Long-Term Debt to Long-Term Capital Ratio
Long-Term Debt to Shareholders’ Equity Ratio
Operating Cash Flow to Average Total Liabilities Ratio
Interest Coverage Ratio
2008
37.7
10 days
0.8
0.3
0.579
70 days
54 days
28 days
96 days
0.561
1.244
0.181
0.221
0.403
9.6
2007
31.7
11.5
0.79
0.34
65.1%
66
61
33
94
0.573
1.340
0.194
0.241
0.506
28.7
2006
32.0
11.4
0.79
0.35
71.6%
63
68
31
100
0.497
0.987
0.001
0.001
0.625
106.8
Required
a. Compute the values of each of the ratios in Exhibit 5.26 for Starbucks for 2008. Starbucks had 735.5 million
common shares outstanding at the end of 2008, and the market price per share was $14.17. For days accounts
receivable, use only specialty revenues in your calculations, because accounts receivable are primarily related to
licensing and food service operations, not the retail operations. Use cost of sales, including occupancy costs, in the
numerator of the GMI in the Beneish earnings manipulation model.
b. Interpret the changes in Starbucks risk ratios during the three-year period, indicating areas of concern.
Page 6 of 14
A)
Page 7 of 14
Page 8 of 14
B)
Short-term solvency:
From the above calculations, it is clear that there is a increase in short-term solvency risk, the current ratio of the
company fell below 1.0 and the quick ratio will be above 0.30 in 2008. Both these ratios have decreased in the three
year period of time. The same downward trend is noticed in operating cash flow to current liabilities. Similarly, the
days of accounts payable has decreased which may be a reason for the decrease in the cash balance. There is a
considerable decrease in the marketable securities which is declining the short-term liquidity.
Long-term solvency:
The total liabilities have also increased during the given three year period of time and also the long-term debt ratio has
also increased. There is increase in the current liabilities. There is a drastic decrease in the interest coverage ratio and
operating cash flow to total liabilities ratio. They are still in the healthy level. Company started to carry the long-term
debt in 2007.These debt do not include those amount pertains to the operating leases. If these expenses are included
the long-term debt will increase further.
Page 9 of 14
Chapter 6
Page 10 of 14
Chapter 12
2011
2010
100.2 %
99.8%
This firm is having profit problem
Expenses have increased faster than revenue
B
76.7%
75%
This frim is using more debt in absolute terms and in relation to operating property
C
170.96%
171.67%
The ratio remained constant
$0.085
D
8.1
8.5 per mile
The firm is generating more revenue per passenger mile , but it suffering from a serious decline in
passenger miles .
A
Page 11 of 14
A)
1
2
3
4
2011
2010
78.72% 79.08%
38.5% 39.47%
7.18% 6.93%
27.71% 27.66%
2009
80.08%
40.83%
6.39%
27.06%
1.
2.
3.
4.
The operating ratio decrease , indicating improved efficiency .
Indicating less risk because a lower percentage of fund were supplied by funded debt
The ratio increased indicating improved profitability
Increased slightly , indicating improved profitability
B)
C)
Cash flow per share has increased much more than EPS .
This would be considered to be positive .
Page 12 of 14
A. 5
B. 3
C.4
D.3
E.5
F.4
Page 13 of 14
A)
1
2
3
4
5
6
2011
85 %
5.10 %
4.17 x
7%
12.75 x
61.90 %
2010
83 %
4.89 %
3.95 x
6.50 %
12.06 x
61.18 %
2009
82.69 %
4.70 %
3.64 x
6%
12.13 x
59.43 %
B)
1.
2.
3.
4.
5.
6.
It has increased , indicating that management has improved in putting bank asset to work .
The ratio has increased , indicating improvement in profitability
The ratio has increased , indicating an improved level of protection of loans
The ratio has increased , indicating an improved cushion against the risk of using debt and leverage
Increase , indicating increased risk
Increase , indicating a prospect of higher return to shareholders
Page 14 of 14