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.

1.00 points out of 1.00

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.

1.00 points out of 1.00

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

Answer 1

a) Times Interest Earned (Interest Coverage Ratio) = EBIT / Interest expense
This ratio tells us how much pre-tax earnings do we have to cover our interest expense.
2016 : 10504 / 1058 = 9.9
2015 : 9620 / 838 = 11.5
2014 : 8965 / 600 = 14.9
Hence, based on the computations, we can see that the Times Interest Earned ratio has steadily decreased since 2014.

b) Current Ratio = Total Current Assets / Total Current Liabilities
2016 : 33930 / 26250 = 1.3 : 1
2015 : 32046 / 23169 = 1.4 : 1
2014 : 28871 / 19027 = 1.5 : 1
Hence, based on the computations, we can see that the Current Ratio has decreased over the past three years, however it is greater than 1 indicating CVS Health Corp. is liquid.
The Standard Current Ratio is 2:1. Since CVS Health Corp's Current Ratio is less than 2:1, it is not sufficiently liquid.

c) Total Liability to Equity (Debt to Equity Ratio) = Total Liabilities / Total Equity
This ratio is a comparison between the amount of financing that comes from the creditors and the amount of financing that comes from the owners (Equity & Preference shareholders).
2016 : 57628 / 39722 = 1.5
2015 : 55234 / 40091 = 1.4
2014 : 36224 / 40851 = 0.9