Question

Problem 4-7 Financial Ratios (LO3)

Here are simplified financial statements for Phone Corporation in a recent year:

INCOME STATEMENT
(Figures in $ millions)
Net sales	$	12,600
Cost of goods sold		3,760
Other expenses		4,127
Depreciation		2,338
Earnings before interest and taxes (EBIT)	$	2,375
Interest expense		655
Income before tax	$	1,720
Taxes (at 35%)		602
Net income	$	1,118
Dividends	$	816

  

BALANCE SHEET
(Figures in $ millions)
	End of Year				Start of Year
Assets
Cash and marketable securities	$	83			$	152
Receivables		2,082				2,370
Inventories		157				208
Other current assets		837				902
Total current assets	$	3,159			$	3,632
Net property, plant, and equipment		19,913				19,855
Other long-term assets		4,156				3,710
Total assets	$	27,228			$	27,197
Liabilities and shareholders’ equity
Payables	$	2,504			$	2,980
Short-term debt		1,389				1,543
Other current liabilities		781				757
Total current liabilities	$	4,674			$	5,280
Long-term debt and leases		8,512				7,907
Other long-term liabilities		6,118				6,089
Shareholders’ equity		7,924				7,921
Total liabilities and shareholders’ equity	$	27,228			$	27,197

Calculate the following financial ratios for Phone Corporation: (Use 365 days in a year. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

Inventory turnover

Average collection period

Operating profit margin

Long term debt ratio

Total debt ratio

Times interest earned

Cash coverage ratio

Current ratio

Quick ratio

Answer 1

a. Inventory turnover = Cost of good sold / inventory

= 3,760 / 208

= 18.07

b. Average collection period= 365 * Receivable / Net sales

= 365 * 2,370 / 12,600

= 68.65 days

c. Operating profit margin = Operating income / net sales

= 1,118 / 12,600

= 0.088 or 8.8%

d. Long term debt ratio = Long term debt / (Long term debt + Equity)

= 8,512 / (8,512 + 7,924)

= 8,512 / 16,436

= 0.51

e. Total debt ratio = Total debt / (Long term debt + Equity)

= Total debt = Current liabilities + long term Debt and lease + other long term liability

= 4,674 + 8,512 + 6,118

= 19,304

Total debt ratio = 19,304 / (8,512 + 7,924)

= 19,304 / 16,436

= 1.17

f. Times interest earned = EBIT / interest

= 2,375 / 655

= 3.62

g. Cash coverage ratio = (EBIT + Depreciation) / Interest

= (2,375 + 2,338) / 655

= 4,713 / 655

= 7.19

h. Current ratio = Current assets / Current liabilities

= 3,159 / 4,674

= 0.67

i. Quick ratio = (Total current assets - Inventory) / Current liabilities

= (3,159 - 157) / 4,674

= 3,002 / 4,674

= 0.64