Question

Compute and Interpret Coverage, Liquidity and Solvency Ratios

Selected balance sheet and income statement information from CVS Health Corp. for 2014 through 2016 follows ($ millions).

	Total Current Assets	Total Current Liabilities	EBIT (Operating income)	Interest Expense, Gross	Total Liabilities	Equity
2016	$33,930	$26,250	$10,504	$1,058	$57,628	$39,722
2015	32,046	23,169	9,620	838	55,234	40,091
2014	28,871	19,027	8,965	600	36,224	40,851

a. Compute times interest earned ratio for each year and discuss any trends for each. Round answers to one decimal place.

Year	TIE Ratio
2016	Answer
2015	Answer
2014	Answer

Based on your computations above, select the most appropriate answer.

Times interest earned has steadily increased since 2014.

Times interest earned has steadily decreased since 2014.

Times interest earned has remained the same since 2014.

Times interest earned increased in 2015 but then decreased in 2016.

b. Compute the current ratio for each year and discuss any trend in liquidity. Round answers to one decimal place.

Year	Current Ratio
2016	Answer
2015	Answer
2014	Answer

Do you believe the company is sufficiently liquid? Explain.

CVS’s current ratio has increased over the past three years and is greater than 1, indicating CVS is liquid.

CVS’s current ratio has decreased over the past three years and it is currently less than 1 indicating CVS is not liquid.

CVS’s current ratio has increased over the past three years, however, it remains less than 1 indicating CVS is not liquid.

CVS’s current ratio has decreased over the past three years, however, it is greater than 1 indicating CVS is liquid.

c. Compute the total liabilities-to-equity ratio for each year and discuss any trends for each.

Round answers to one decimal place.

Year	Liabilities to Equity
2016	Answer
2015	Answer
2014	Answer

Based on your computations above, select the most appropriate answer.

CVS's liabilities to equity ratio has increased since 2014, however, the ratio is relatively low, concluding CVS is solvent.

CVS's liabilities to equity ratio has decreased since 2014, remaining relatively low, concluding CVS is solvent.

CVS's liabilities to equity ratio has increased since 2014, and is relatively high, concluding CVS is insolvent.

CVS's liabilities to equity ratio has decreased since 2014, remaining relatively low, concluding CVS is insolvent.

d. What is your overall assessment of the company’s credit risk from the analyses in (a), (b), and (c)?

CVS is a low credit risk as it has a low level of debt, is liquid and can easily meet its interest expenses.

CVS is a low credit risk as its liabilities to equity ratio, current ratio, and times interest earned ratio have all decreased since 2014.

CVS is a medium to high credit risk as its level of debt has increased and its current ratio and times interest ratio have decreased.

CVS is a medium to high credit risk as its liabilities to equity ratio, current ratio, and times interest earned ratio have all increased since 2014.

Answer 1

times interest earned ratio	EBIT / interest expenses
	2014 ($)	2015 ($)	2016 ($)
EBIT	8965	9620	10504
interest expenses	600	838	1058
times interest earned ratio	14.9	11.5	9.9
ratio has steadily decreased since 2014
current ratio	current assets / current liabilities
	2014 ($)	2015 ($)	2016 ($)
current assets	28871	32046	33930
current liailities	19027	23169	26250
current ratio	1.5	1.4	1.3
ratio has decreased over the past three years, but is greater than 1 indicating CVS is liquid
total liabilities-to-equity ratio	total liabilities / total equity
	2014 ($)	2015 ($)	2016 ($)
total liabilities	36224	55234	57628
total equity	40851	40091	39722
total liabilities-to-equity ratio	0.9	1.4	1.5
ratio has increased since 2014, the ratio is relatively low, concluding CVS is solvent

CVS is a medium to high credit risk as its level of debt has increased and its current ratio and times interest ratio have decreased.