Question

1. Below is selected balance sheet and income statement information from O'Reilly

(in millions)	2019	2017
Cash	$   1,600.00	$ 1,500.00
Accounts receivable	1,197.16	835.30
Current assets	4,013.56	3,018.33
Current liabilities	3,485.39	6,257.95
Long-term debt	17,620.81	3,611.63
Short-term debt	1,133.96	4,668.83
Total liabilities	23,318.42	26,463.17
Interest expense	1,666.90	1,438.29
Capital expenditures	1,645.48	1,211.50
Equity	4,600.00	-7,200.00
Cash from operations	610.89	685.98
Earnings before interest and taxes	1,594.84	2,002.84

1. Compute the following liquidity, solvency and coverage ratios for both years.

(Round each computation to two decimal places.)

• Quick ratio

• Total debt-to-equity

• Times interest earned

2. What is your overall assessment of the company’s credit risk? Explain. What differences do you observe between the two years? No less than 2points. (1/. )

Answer 1

Solution:

Part A )

2017

• Quick ratio = (Cash + AR ) / Current Liability = (1500 + 835.30) / 6,257.95 = 0.37

• Total debt-to-equity = Total debt / Equity = (Long term asset + short term asset )/ Equity = (3,611.63+4,668.83)/-7,200.00 = -1.15

• Times interest earned =  Earnings before interest and taxes / Interest = 2,002.84 / 1,438.29 =1.39

2019

• Quick ratio = (Cash + AR ) / Current Liability = (1,600 + 1,197.16) /3,485.39 = 0.80

• Total debt-to-equity = Total debt / Equity = (Long term asset + short term asset )/ Equity = (17,620.81 + 1,133.96 ) / 4,600 = 4.07

• Times interest earned =  Earnings before interest and taxes / Interest = 1,594.84 / 1,666.90=0.96

Part B )

The credit risk of the company is very high as the Debt to equity ratio is very high. Times interest earned ratio is also very low and it means that the firm is generating low operating profit as compared to the interest expense.

From the year 2017 to 2019 the Debt to equity ratio has improved slightly as the equity has become positive, and times interest earned has decreased from 1.39 to 0.96.