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.

Income Statement
Year Ended December 31 (In millions)	2005	2004	2003
Net sales
Products	$ 31,518	$ 30,202	$ 27,290
Service	5,695	5,324	4,534
	37,213	35,526	31,824
Cost of sales
Products	28,800	27,879	25,306
Service	5,073	4,765	4,099
Unallocated coporate costs	803	914	443
	34,676	33,558	29,848
	2,537	1,968	1,976
Other income (expenses), net	449	121	43
Operating profit	2,986	2,089	2,019
Interest expense	370	425	487
Earnings before taxes	2,616	1,664	1,532
Income tax expense	791	398	479
Net earnings	$ 1,825	$ 1,266	$ 1,053

Balance Sheet
December 31 (In millions)	2005	2004
Assets
Cash and cash equivalents	$ 2,244	$ 1,060
Short-term investments	429	396
Receivables	4,579	4,094
Inventories	1,921	1,864
Deferred income taxes	861	982
Other current assets	495	557
Total current assets	10,529	8,953
Property, plant and equipment, net	3,924	3,599
Investments in equity securities	196	812
Goodwill	8,447	7,892
Purchased intangibles, net	560	672
Prepaid pension asset	1,360	1,030
Other assets	2,728	2,596
Total assets	$ 27,744	$ 25,554
Liabilities and stockholders' equity
Accounts payable	$ 1,998	$ 1,726
Customer advances and amounts in excess of costs incurred	4,331	4,028
Salaries, benefits and payroll taxes	1,475	1,346
Current maturities of long-term debt	202	15
Other current liabilities	1,422	1,451
Total current liabilities	9,428	8,566
Long-term debt	4,784	5,104
Accrued pension liabilities	2,097	1,660
Other postretirement benefit liabilities	1,277	1,236
Other liabilities	2,291	1,967
Stockholders' equity
Common stock, $1 par value per share	432	438
Additional paid-in capital	1,724	2,223
Retained earnings	7,278	5,915
Accumulated other comprehensive loss	(1,553)	(1,532)
Other	(14)	(23)
Total stockholders' equity	7,867	7,021
Total liabilities and stockholders' equity	$ 27,744	$ 25,554

Consolidated Statement of Cash Flows
Year Ended December 31 (In millions)	2005	2004	2003
Operating Activities
Net earnings	$ 1,825	$ 1,266	$ 1,053
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization	555	511	480
Amortization of purchased intangibles	150	145	129
Deferred federal income taxes	24	(58)	467
Changes in operating assets and liabilities:
Receivables	(390)	(87)	(258)
Inventories	(39)	519	(94)
Accounts payable	239	288	330
Customer advances and amounts in excess of costs incurred	296	(228)	(285)
Other	534	568	(13)
Net cash provided by operating activities	3,194	2,924	1,809
Investing Activities
Expenditures for property, plant and equipment	(865)	(769)	(687)
Acquisition of business/investments in affiliated companies	(564)	(91)	(821)
Proceeds from divestiture of businesses/Investments in affiliated companies	935	279	234
Purchase of short-term investments, net	(33)	(156)	(240)
Other	28	29	53
Net cash used for investing activities	(499)	(708)	(1,461)
Financing Activities
repayment of long-term debt	(133)	(1,089)	(2,202)
Issuances of long-term debt	--	--	1,000
Long-term debt repayment and issuance costs	(12)	(163)	(175)
Issuances of common stock	406	164	44
Repurchases of common stock	(1,310)	(673)	(482)
Common stock dividends	(462)	(405)	(261)
Net cash used for financing activities	(1,511)	(2,166)	(2,076)
Net increase (decrease) in cash and cash equivalents	1,184	50	(1,728)
Cash and cash equivalents at beginning of year	1,060	1,010	2,738
Cash and cash equivalents at end of year	$ 2,244	$ 1,060	$ 1,010

(a) Compute Lockheed Martin's current ratio and quick ratio for 2005 and 2004. (Round your answers to two decimal places.)
2005 current ratio = Answer

2004 current ratio = Answer

2005 quick ratio = Answer

2004 quick ratio = Answer

Which of the following best describes the company's current ratio and quick ratio for 2005 and 2004?

The current ratio has increased while the quick ratio has decreased in the period from 2004 to 2005, which suggests the company has a shortage of liquid assets.

Both the current and quick ratios have decreased from 2004 to 2005. The company is fairly illiquid.

Both the current and quick ratios have increased from 2004 to 2005. The company is fairly liquid.

The current ratio has decreased while the quick ratio has increased in the period from 2004 to 2005, which suggests the company has a shortage of current assets.

(b) Compute total liabilities-to-equity ratios and total debt-to-equity ratios for 2005 and 2004. (Round your answers to two decimal places.)
2005 total liabilities-to-stockholders' equity = Answer

2004 total liabilities-to-stockholders' equity = Answer

2005 total debt-to-equity = Answer

2004 total debt-to-equity = Answer

Which of the following best describes the company's total liabilities-to-equity ratios and total debt-to-equity ratios for 2005 and 2004?

The total liabilities-to-equity ratio has decreased while the total debt-to-equity ratio has increased in the period from 2004 to 2005, 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 2004 to 2005, 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 2004 to 2005. These increases suggest that the company is less solvent.

Both the total liabilities-to-equity and total debt-to-equity ratios have decreased from 2004 to 2005. 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.)
2005 times interest earned = Answer

2004 times interest earned = Answer

2005 cash from operations to total debt = Answer

2004 cash from operations to total debt = Answer

2005 free operating cash flow to total debt = Answer

2004 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 2005 and 2004? (Select all that apply)
Answeryesno

Lockheed Martin's free operating cash flow to total debt ratio increased slightly over the year 2005 due to increased cash flow from operations and decreased levels of debt.
Answeryesno

Lockheed Martin's times interest earned decreased significantly during 2005, due to both a decrease in profitability and an increase in interest expense.
Answeryesno

Lockheed Martin's cash from operations to total debt ratio increased slightly over the year 2005 due to increased cash flow from operations and decreased levels of debt.
Answeryesno

Lockheed Martin's times interest earned increased significantly during 2005, due to both an increase in profitability and a decrease in interest expense.

(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 very 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 very 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 high, 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): Current ratio = current assets/current liabilities

2005 current ratio = 10529/9428 = 1.12

2004 current ratio = 8953/8566 = 1.05

Quick ratio = (cash+short term investments+receivables)/current liabilities

2005 Quick Ratio = (2244+429+4579)/9428 = 0.77

2004 Quick Ratio = (1060+396+4094)/8566 = 0.65

The correct statement is: Both the current and quick ratios have increased from 2004 to 2005. The company is fairly liquid.

(b): Total liabilities to stockholders equity = (total liabilities + equity – equity)/equity

2005 Total liabilities to stockholders equity = (27744-7867)/7867 = 2.53

2004 Total liabilities to stockholders equity = ((25554-7021)/7021 = 2.64

Total debt to equity = (current maturities of long term debt + long term debt)/equity

2005 debt to equity ratio = (202+4784)/7867 = 0.63

2004 debt to equity ratio = (15+5104)/7021 = 0.73

The correct statement is: Both the total liabilities-to-equity and total debt-to-equity ratios have decreased from 2004 to 2005. The difference between these two measures reveals that any solvency concerns would be for the short run.

(c ): Times interest earned = Operating profit/Interest expense

2005 Times interest earned = 2986/370 = 8.07

2004 Times interest earned = 2089/425 = 4.92

Cash from operations to total debt ratio = cash flow from operations/total debt

2005 Cash from operations to total debt ratio = 3194/(202+4784) = 0.64

2004 Cash from operations to total debt ratio = 2924/ (15+5104)/ = 0.57

free operating cash flow to total debt = (cash flow from operations - capex)/total debt

2005 free operating cash flow to total debt = (3194-865)/(202+4784) = 0.47

2004 free operating cash flow to total debt = (2924-769)/(15+5104) = 0.42

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