Question

Analyzing the quality of firm earnings)  

Kabutell, Inc. had net income of $650,000, cash flow from financing activities of $80,000, depreciation expenses of $60,000, and cash flow from operating activities of $550,000.

a.  Calculate the quality of earnings ratio. What does this ratio tell you?

b.  Kabutell, Inc. reported the following in its annual reports for

2011–2013:

($ million)	2011	2012	2013
Cash Flow from Operations	$479	$404	$470
Capital Expenditures (CAPEX)	$458	$448	$454

Calculate the average capital acquisitions ratio over the three-year period. How would you interpret these results?

Answer 1

a) Quality of earnings ratio = Cash flow from operations / net income

                     = 550000/650000

                     = 0.85

b) Average capital acquisition ratio = Ave. cash flow from operations/Ave. cash paid for acquisitions

= ((479+404+470)/3)/((458+448+454)/3)

                               = 451/453

                               = 0.99