Question

Compute and Interpret Liquidity, Solvency and Coverage Ratios Selected balance sheet and income statement information for Nordstrom, Inc. for 2016 and 2015 follows. ($ millions) 2016 2015 Cash $ 595 $ 827 Accounts receivable 196 2,306 Current assets 3,014 5,224 Current liabilities 2,911 2,800 Long-term debt 2,795 3,123 Short-term debt 10 8 Total liabilities 6,827 6,805 Interest expense 153 156 Capital expenditures 1,082 861 Equity 871 2,440 Cash from operations 2,451 1,220 Earnings before interest and taxes 1,101 1,323 (a) Compute the following liquidity, solvency and coverage ratios for both years. Round all your answers to two decimal places. 2016 current ratio = Answer 2015 current ratio = Answer 2016 quick ratio = Answer 2015 quick ratio = Answer 2016 liabilities-to-equity = Answer 2015 liabilities-to-equity = Answer 2016 total debt-to-equity = Answer 2015 total debt-to-equity = Answer 2016 times interest earned = Answer 2015 times interest earned = Answer 2016 cash from operations to total debt = Answer 2015 cash from operations to total debt = Answer 2016 free operating cash flow to total debt = Answer 2015 free operating cash flow to total debt = Answer (b) Which of the following best describes the company's credit risk? Both the quick and current ratios for 2016 decreased in the past year. The current ratio remains above 1.0, but this is driven in large part by high inventory levels, implying Nordstrom may have difficulty converting assets to cash. In addition, its interest coverage ratio remains high, indicating it has it may have difficulty making interest payments on its debt. Both the quick and current ratios for 2016 decreased in the past year but are higher than 1.0, implying Nordstrom is relatively liquid. Nordstrom's interest coverage ratio remains high, indicating it has the ability to cover interest payments on its debt. Both the quick and current ratios for 2016 decreased in the past year. The current ratio remains above 1.0, but this is driven in large part by high inventory levels, implying Nordstrom may have difficulty converting assets to cash. However, its interest coverage ratio remains high, indicating it has the ability to cover interest payments on its debt. Both the quick and current ratios for 2016 decreased in the past year but are higher than 1.0, implying Nordstrom is relatively liquid. Nordstrom's interest coverage ratio is weak, indicating it may have difficulty making interest payments on its debt.

Answer 1

(A) Current Ratio = Current Assets/Current Liabilities
Current Asset	3014	5224
Current Liabilities	2911	2800
Current Ratio	1.04	1.87
(B) Quick Ratio = Liquid Asset/Current Liabilities
Liquid Asset = AR+Cash
Liquid Asset	791	3133
Current Liabilities	2911	2800
Liquid Ratio	0.27	1.12
(C) Liabilities to Equity
Total liability include Current Liability + Short term Debt + Long Term Debt
Total Liability	5716	5931
Equity	871	2440
Liability to Equity	6.56	2.43
(D) Debt to Equity Ratio
Debt include Long Term Debt + Short Term Debt
Debt	2805	3131
Equity	871	2440
Debt to Equity Ratio	3.22	1.28
(E) Times Interest Earned
EBIT	1101	1323
Interest Expenses	153	156
Times Interest earned	7.20	8.48
(F) Cash From operation to total debt
Total Debt = Current Liabilities + Long Term Debt + Short Term Debt
Cash from Operation	2451	1220
Debt	5716	5931
Debt Coverage Ratio	43%	21%
(G) Free Operation Cash Flow to Total Debt
Free Cash Flow = Operating Cash Flow - Capital Expenditure
Free Cash Flow	1369	359
Total Debt	5716	5931
Ratio	24%	6%

Both the quick and current ratios for 2016 decreased in the past year. The current ratio remains above 1.0, but this is driven in large part by high inventory levels, implying Nordstrom may have difficulty converting assets to cash. However, its interest coverage ratio remains high, indicating it has the ability to cover interest payments on its debt.