Question

Compute and Interpret Liquidity, Solvency and Coverage Ratios

Balance sheets and income statements for Lockheed Martin Corporation follow. Refer to these financial statements to answer the requirements.

Consolidated Statements of Earnings
Year Ended December 31 (In millions)	2016	2015
Net sales
Products	$ 40,365	$ 34,868
Services	6,883	5,668
Total net sales	47,248	40,536
Cost of sales
Products	(36,616)	(31,091)
Services	(6,040)	(4,824)
Severance and other charges	(80)	(82)
Other unallocated costs	550	(47)
Total cost of sales	(42,186)	(36,044)
Gross Profit	5,062	4,492
Other income, net	487	220
Operating profit	5,549	4,712
Interest expense	(663)	(443)
Other non-operating income (expense), net	-	30
Earnings before taxes	4,886	4,299
Income tax expense	(1,133)	(1,173)
Net earnings from continuing operations	3,753	3,126
Net (loss) earnings from discontinued operations	1,549	479
Net earnings	$ 5,302	$ 3,605

Consolidated Balance Sheets
December 31 (in millions, except par value)	2016	2015
Assets
Current Assets
Cash and cash equivalents	$ 1,837	$ 1,090
Receivables, net	8,202	7,254
Inventories, net	4,670	4,819
Other current assets	399	441
Assets of discontinued operations	-	969
Total current assets	15,108	14,573
Property, plant and equipment, net	5,549	5,389
Goodwill	10,764	10,695
Intangible assets, net	4,093	4,022
Deferred income taxes	6,625	6,068
Other noncurrent assets	5,667	5,396
Assets of discontinued operations	-	3,161
Total assets	$ 47,806	$ 49,304
Liabilities and stockholders' equity
Current Liabilities
Accounts payable	$ 1,653	$ 1,745
Customer advances and amounts in excess of costs incurred	6,776	6,703
Salaries, benefits and payroll taxes	1,764	1,707
Current maturities of long-term debt	-	956
Other current liabilities	2,349	1,859
Liabilities of discontinued operations	-	948
Total current liabilities	12,542	13,918
Long-term debt	14,282	14,305
Accrued pension liabilities	13,855	11,807
Other post-retirement benefit liabilities	862	1,070
Other noncurrent liabilities	4,659	4,902
Liabilities of discontinued operations	-	205
Total Liabilities	46,200	46,207
Stockholders' equity
Common stock, $1 par value per share	289	303
Additional paid-in capital	--	--
Retained earnings	13,324	14,238
Accumulated other comprehensive loss	(12,102)	(11,444)
Total stockholders' equity	1,511	3,097
Noncontrolling interests in subsidiary	95	-
Total equity	1,606	3,097
Total liabilities and stockholders' equity	$ 47,806	$ 49,304

Consolidated Statement of Cash Flows
Year Ended December 31 (in millions)	2016	2015
Operating Activities
Net earnings	$ 5,302	$ 3,605
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	1,215	1,026
Stock-based compensation	149	138
Deferred income taxes	(152)	(445)
Severance charges	99	102
Gain on divestiture of IS&GS business	(1,242)	-
Gain on step acquisition of AWE	(104)	-
Changes in operating assets and liabilities:
Receivables, net	(811)	(256)
Inventories, net	(46)	(398)
Accounts payable	(188)	(160)
Customer advances and amounts in excess of costs incurred	3	(32)
Post-retirement benefit plans	1,028	1,068
Income taxes	146	(48)
Other, net	(210)	501
Net cash provided by operating activities	5,189	5,101
Investing Activities
Capital expenditures	(1,063)	(939)
Acquisition of business/investments in affiliated	-	(9,003)
Other, net	78	208
Net cash used for investing activities	(985)	(9,734)
Financing Activities
Special cash payment from divestiture of IS&GS businessk	1,800	-
Repurchases of common stock	(2,096)	(3,071)
Proceeds from stock option exercises	106	174
Dividends paid	(2,048)	(1,932)
Proceeds from the issuance of long-term debt	-	9,101
Repayments of long-term debt	(952)	-
Proceeds from borrowings under revolving credit facilities	-	6,000
Repayments from borrowings under revolving credit facilities	-	(6,000)
Other, net	(267)	5
Net cash (used for) financing activities	(3,457)	4,277
Net change in cash and cash equivalents	747	(356)
Cash and cash equivalents at beginning of year	1,090	1,446
Cash and cash equivalents at end of year	$ 1,837	$ 1,090

(a) Compute Lockheed Martin's current ratio and quick ratio for 2016 and 2015. (Round your answers to two decimal places.)
2016 current ratio = Answer

2015 current ratio = Answer

2016 quick ratio = Answer
2015 quick ratio = Answer

Which of the following best describes the company's current ratio and quick ratio for 2016 and 2015?

The current ratio has increased while the quick ratio has decreased in the period from 2015 to 2016 , which suggests the company has a shortage of liquid assets.

Both the current and quick ratios have decreased from 2015 to 2016 however, the company is liquid.

Both the current and quick ratios have increased from 2015 to 2016, meaning the company is liquid.

The current ratio has decreased while the quick ratio has increased from 2015 to 2016, which suggests the company has a shortage of current assets.

(b) Compute total liabilities-to-equity ratios and total debt-to-equity ratios for 2016 and 2015 . (Round your answers to two decimal places.)
2016 total liabilities-to-stockholders' equity = Answer
2015 total liabilities-to-stockholders' equity = Answer

2016 total debt-to-equity = Answer
2015 total ebt-to-equity = Answer

Which of the following best describes the company's total liabilities-to-equity ratios and total debt-to-equity ratios for 2016 and 2015?

The total liabilities-to-equity ratio has decreased while the total debt-to-equity ratio has increased in the period from 2015 to 2016, which suggests the company has decreased the use of short-term debt financing.

The total liabilities-to-equity ratio has increased while the total debt-to-equity ratio has decreased in the period from 2015 to 2016, which suggests the company has increased the use of short-term debt financing.

Both the total liabilities-to-equity and total debt-to-equity ratios have increased from 2015 to 2016. These increases suggest that the company is less solvent.

Both the total liabilities-to-equity and total debt-to-equity ratios have decreased from 2015 to 2016. The difference between these two measures reveals that any solvency concerns would be for the short run.

(c) Compute times interest earned ratio, cash from operations to total debt ratio, and free operating cash flow to total debt ratios. (Round your answers to two decimal places.)
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

Which of the following describes the company's times interest earned, cash from operations to total debt, and free operating cash flow to total debt ratios for 2016 and 2015? (Select all that apply)
Answeryesno Lockheed Martin's free operating cash flow to total debt ratio slightly decreased over the year 2016 due to decreased cash flow from operations.
Answeryesno Lockheed Martin's times interest earned decreased during 2016, due an increase in interest expense.
Answeryesno Lockheed Martin's cash from operations to total debt ratio slightly increased over the year 2016 due to a decrease in total debt.
Answeryesno Lockheed Martin's times interest earned increased during 2016, due to an increase in profitability.

(d) Summarize your findings in a conclusion about the company's credit risk. Do you have any concerns about the company's ability to meet its debt obligations?

Lockheed Martin's total debt-to-equity is low, thus increasing any immediate solvency concerns. The company's ability to meet its debt requirements will depend on increasing short-term debt.

Lockheed Martin's quick ratio is low, thus increasing immediate solvency concerns. The company's ability to meet its debt requirements will depend on liquidating inventories for emergency cash.

Lockheed Martin's times interest earned ratio is strong, thus lessening any immediate solvency concerns. The company's ability to meet its debt requirements will depend on its continued profitability.

Lockheed Martin's total liabilities-to-equity is high, thus lessening any immediate solvency concerns. The company's ability to meet its debt requirements will depend on its use of equity financing.

Answer 1

A. Both the current and quick ratios have increased from 2015 to 2016, meaning the company is liquid.

B. Both the total liabilities-to-equity and total debt-to-equity ratios have increased from 2015 to 2016. These increases suggest that the company is less solvent.

C. Answeryesno Lockheed Martin's times interest earned decreased during 2016, due an increase in interest expense.

Answeryesno Lockheed Martin's cash from operations to total debt ratio slightly increased over the year 2016 due to a decrease in total debt.