Visit the website of your favorite U.S. company. Find the company’s financial statements in the section of
the website for investors. Post a link to the statements. Compute two ratios from each type, including
liquidity, solvency, and profitability. What do these ratios tell you about the financial status of this
company?
The company I selected this week is Whole Foods. The url for the 2011 Stakeholders'
Report is: http://www.wholefoodsmarket.com/company/annual-reports.php.
Two measures of liquidity are working capital and the current ratio.
Working capital = current assets – current liabilities
Working capital = 1,453,144 – 879,361
Working capital = 734,047
The current assets for Whole Foods exceed the current liabilities so the working capital is
positive. This is an indication that Whole Foods would not have any difficulty paying
short-term debts.
Current ratio = current assets/current liabilities
Current ratio = 1,453,144/879,361
Current ratio = 1.65:1
The current ratio indicates the ability of a company to pay debts and meet cash needs in the
short term. Whole Foods has a current ratio of 1.65:1 so the company has $1.65 of current
assets for each dollar of current liabilities. Whole Foods appears to be in a good position
with regard to liquidity.
Solvency ratios provide an indication of a company’s ability to pay its debts as they mature.
The debt to total assets ratio “measures the percentage of total financing provided by
creditors rather than stockholders” (Kimmel, Weygandt, & Kieso, 2009, p. 60).
Debt to total assets ratio = total liabilities/total assets
Debt to total assets ratio = 1,300,770/4,292,075
Debt to total assets ratio = 30%
The 2011 ratio indicates that each dollar of assets was financed by $.30 of debt. The lower
the ratio, the better for creditors—the company is in a better position to pay creditors in the
event the company goes into bankruptcy.
Free cash flow measures a company’s cash-generating abilities. A higher amount of free
cash flow is desirable to long-term creditors because it is an indication of solvency.
Free cash flow = cash provided by operations – capital expenditures – cash dividends
Free cash flow = 754,845 – 364964 – 52,620
Free cash flow = 337,261
The profitability ratios indicate the success of operations or the income during a period.
The profitability ratios can impact a company’s ability to obtain long- and short-term
financing. Two profitability ratios are earnings per share and profit margin ratio.
Earnings per share = net income-preferred stock dividends/average common shares
outstanding
Earnings per share = 342,612 -0/175,221
Earnings per share = 1.96
Profit margin ratio = net income/net sales
Profit margin ratio = 342,612/10,107,787
Profit margin ratio = 3.4%
Whole Foods generated $.034 for each dollar of sales.
Reference
Kimmel, P. D., Weygandt, J. J., Kieso, D. E. (2009). Accounting: Tools for business
decision making (3rd ed.). Hoboken, NJ: John Wiley & Sons.
Whole Foods. (2012). Annual stakeholder’s report. Retrieved from
http://www.wholefoodsmarket.com/company/annual-reports.php