Compute and Interpret Liquidity, Solvency and Coverage Ratios
Selected balance sheet and income statement information for Nordstrom, Inc. for 2014 and 2013 follows.
| Cash |
$ 1,194 |
$ 1,285 |
| Accounts receivable |
2,177 |
2,129 |
| Current assets |
5,228 |
5,081 |
| Current liabilities |
2,541 |
2,226 |
| Long-term debt |
3,113 |
3,131 |
| Short-term debt |
0 |
0 |
| Total liabilities |
6,494 |
6,176 |
| Interest expense |
161 |
160 |
| Capital expenditures |
803 |
513 |
| Equity |
2,080 |
1,913 |
| Cash from operations |
1,320 |
1,110 |
| Earnings before interest and taxes |
1,350 |
1,345 |
1. Compute 2014 and 2013 Current ratio
2. Compute 2014 and 2013 Quick ratio
3. Compute 2014 and 2013 liabilities to equity ratio
4. Compute 2014 and 2013 long term debt to equity ratio
5. Compute 2014 and 2013 times interest earned ratio
6. Compute 2014 and 2013 cash from operations to total debt ratio
7. Compute 2014 and 2013 free operating cash flow to total debt ratio
8. Which of the following best describes the company's credit risk?
A. Both the quick and current ratios for 2014 increased in the past year and are higher than 1.0, implying Nordstrom is relatively liquid. However, interest coverage ratios are high, indicating it may have difficulty making interest payments on its debt.
B. Both the quick and current ratios for 2014 decreased in the past year but are higher than 1.0, implying Nordstrom is relatively liquid. Interest coverage ratios are strong, indicating it has the ability to cover interest payments on its debt.
C. Both the quick and current ratios for 2014 decreased in the past year and are higher than 1.0, implying Nordstrom is would have difficulty converting assets to cash, if needed. However, interest coverage ratios are strong, indicating it has the ability to cover interest payments on its debt.
D. Both the quick and current ratios for 2014 decreased in the past year but are higher than 1.0, implying Nordstrom is relatively liquid. Interest coverage ratios are weak, indicating it may have difficulty making interest payments on its debt.