Question

In: Finance

Label each section Below is selected balance sheet and income statement information from aldo Company. (in...

Label each section

Below is selected balance sheet and income statement information from aldo Company.

(in millions)

2014

2012

Cash

$ 1,483.36

$   1,536.73

Accounts receivable

735.30

1,097.16

Current assets

2,918.33

3,913.56

Current liabilities

6,157.95

3,385.39

Long-term debt

3,611.63

17,620.81

Short-term debt

4,568.83

1,033.96

Total liabilities

26,363.17

23,218.42

Interest expense

1,338.29

1,566.90

Capital expenditures

211.50

1,545.48

Equity

-7,152.90

4,587.67

Cash from operations

185.98

110.89

Earnings before interest and taxes

1,902.84

1,594.84

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

  • Current ratio (2014, 2012)
  • Liabilities-to-equity (2014, 2012)  
  • Times interest earned (2014, 2012)
  • Cash from operations to total debt (2014, 2012)
  • Free operating cash flow to total debt (2014, 2012)

b.  What is your overall assessment of the company’s credit risk? Explain. What differences do you observe between the two years? Please be brief.

Solutions

Expert Solution

Ratios 2014 2012 Calculations 2014 Calculations 2012
Current ratio 0.47 1.16 2918.33/6157.95 3913.56/3385.39
Liabilities to equity -3.69 5.06 26363.17/-7152.9 23218.42/4587.67
Times interest earned 1.42 1.02 1902.84/1338.29 1594.84/1566.9
Cash from operations to total debt 0.02 0.01 185.98/(3611.63+4568.83) 110.89/(17620.81+1033.96)
Free operating cash flow to total debt 0.00 -0.08 (185.98-211.5)/(3611.63+4568.83) (110.89-1545.48)/(17620.81+1033.96)

b) The company has high credit risk. It is not generating enough cash to meet its future requirements. Though some of the ratios such as times interest earned, cash from operations to total debt and free operating cash flow to debt has improved but the numbers are not convincing. The company is at high credit risk and its main focus should be to generate more operating cash flows. Moreover, the company has negative equity balance which suggests that the company has high leverage which could pose problems in repaying them with decreased available cash flows.

Its short term liquidity is a concern too, as the current ratio of the company has come down in the past two years.

In the past two years, ratios like times interest earned, cash from operations to total debt and free operating cash flow to total debt has improved marginally indicating the management is working towards improving its credit profile. However, its short term liquidity is still a concern as the current ratio has decreased drastically. Thus, as I have discussed before the company's credit profile is at risk and it has high leverage which is a concern.

jeff jeffy answered 11 months ago
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