Question

Compute and Interpret Liquidity, Solvency and Coverage Ratios
Selected balance sheet and income statement information for Nordstrom, Inc. for 2014 and 2013 follows.

($ millions)	2014	2013
Cash	$ 1,194	$ 1,285
Accounts receivable	2,177	2,129
Current assets	5,228	5,081
Current liabilities	2,541	2,226
Long-term debt	3,113	3,131
Short-term debt	0	0
Total liabilities	6,494	6,176
Interest expense	161	160
Capital expenditures	803	513
Equity	2,080	1,913
Cash from operations	1,320	1,110
Earnings before interest and taxes	1,350	1,345

(a) Compute the following liquidity, solvency and coverage ratios for both years. (Round your answers to two decimal places.)
2014 current ratio = Answer
2013 current ratio = Answer

2014 quick ratio = Answer
2013 quick ratio = Answer

2014 liabilities-to-equity = Answer
2013 liabilities-to-equity = Answer

2014 total debt-to-equity = Answer
2013 total debt-to-equity = Answer

2014 times interest earned = Answer
2013 times interest earned = Answer

2014 cash from operations to total debt = Answer
2013 cash from operations to total debt = Answer

2014 free operating cash flow to total debt = Answer
2013 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 2014 increased in the past year and are higher than 1.0, implying Nordstrom is relatively liquid. However, interest coverage ratios are high, indicating it may have difficulty making interest payments on its debt.

Both the quick and current ratios for 2014 decreased in the past year but are higher than 1.0, implying Nordstrom is relatively liquid. Interest coverage ratios are strong, indicating it has the ability to cover interest payments on its debt.

Both the quick and current ratios for 2014 decreased in the past year and are higher than 1.0, implying Nordstrom is would have difficulty converting assets to cash, if needed. However, interest coverage ratios are strong, indicating it has the ability to cover interest payments on its debt.

Both the quick and current ratios for 2014 decreased in the past year but are higher than 1.0, implying Nordstrom is relatively liquid. Interest coverage ratios are weak, indicating it may have difficulty making interest payments on its debt.

Answer 1

A) Calculation of Ratios

1) Current Ratio = Current Assets/ Current Liabilities

For Year 2014 = 5,228/ 2,541 ==> 2.05:1

For Year 2013 = 5,081/2,226 ==> 2.28:1

2) Quick Ratio = Quick Assets/ Current Liabilities, where Quick assets = Current Assets - Inventory

Here, Quick assets is considered as aggregate of cash and accounts receivables

For Year 2014 = 3,371/ 2541 ==> 1.33:1

For Year 2013 = 3,414/ 2,226 ==> 1.53:1

3) Liabilities to equity ratio = Total Liabilities/ Equity

For Year 2014 = 6,494/ 2,080 ==> 3.12:1

For Year 2013 = 6,176/ 1,913 ==> 3.23:1

4) Debt to Equity ratio = Total Debt/ Equity

For Year 2014 = 3,113/ 2,080 ==> 1.49:1

For Year 2013 = 3,131/ 1,913 ==> 1.64:1

5) Interest earned ratio = EBIT/ Interest expenses

For Year 2014 = 1,350/ 161 ==> 8.39 Times

For Year 2013 = 1,345/ 160 ==> 8.40 Times

6) Cash from operations to total debt ratio = Cash from operations/ total debt

For Year 2014 = 1,320/ 3,113 ==> 42%

For Year 2013 = 1,110/ 3,131 ==> 35%

7) Free operating cash flow to total debt ratio = Free operating cash flow/ total debt

where, free operating cash flow = Cash from operation - capital expenditure

For Year 2014 = (1,320-803)/ 3,113 ==> 17%

For Year 2013 = (1,110-513)/ 3,131 ==> 19%

B) Both the quick and current ratios for 2014 decreased in the past year but are higher than 1.0, implying Nordstrom is relatively liquid. Interest coverage ratios are strong, indicating it has the ability to cover interest payments on its debt.