Compute and Interpret Liquidity, Solvency and Coverage Ratios
Information from the balance sheet, income statement, and statement of cash flows for Nike follows. Refer to these financial statements to answer the requirements.
| NIKE, INC. Consolidated Statements of Income |
|||
|---|---|---|---|
| Year Ended December 31 (In millions) | 2019 | 2018 | |
| Revenues | $39,117 | $36,397 | |
| Cost of sales | 21,643 | 20,441 | |
| Gross profit | 17,474 | 15,956 | |
| Demand creation expense | 3,753 | 3,577 | |
| Operating overhead expense | 8,949 | 7,934 | |
| Total selling and administrative expense | 12,702 | 11,511 | |
| Interest expense (income), net | 49 | 54 | |
| Other (income) expense, net | (78) | 66 | |
| Income before income taxes | 4,801 | 4,325 | |
| Income tax expense | 772 | 2,392 | |
| Net income | $ 4,029 | $ 1,933 | |
| Consolidated Balance Sheets | ||
|---|---|---|
| May 31 (in millions) | 2019 | 2018 |
| Current Assets | ||
| Cash and cash equivalents | $ 4,466 | $ 4,249 |
| Short-term investments | 197 | 996 |
| Accounts receivable, net. | 4,272 | 3,498 |
| Inventories | 5,622 | 5,261 |
| Prepaid expenses and other current assets | 1,968 | 1,130 |
| Total current assets | 16,525 | 15,134 |
| Property, plant and equipment, net | 4,744 | 4,454 |
| Identifiable intangible assets, net | 283 | 285 |
| Goodwill | 154 | 154 |
| Deferred income taxes | 2,011 | 2,509 |
| Total assets | $23,717 | $22,536 |
| Liabilities and stockholders' equity | ||
| Current Liabilities | ||
| Current portion of long-term debt | $6 | $6 |
| Notes payable | 9 | 336 |
| Accounts payable | 2,612 | 2,279 |
| Accrued pension liabilities | 5,010 | 3,269 |
| Income taxes payable | 229 | 150 |
| Total current liabilities | 7,866 | 6,040 |
| Long-term debt | 3,464 | 3,468 |
| Deferred income taxes and other liabilities | 3,347 | 3,216 |
| Shareholders’ equity | ||
| Class A convertible—315 and 329 shares outstanding | -- | -- |
| Class B—1,253 and 1,272 shares outstanding | 3 | 3 |
| Capital in excess of stated value | 7,163 | 6,384 |
| Accumulated other comprehensive income (loss) | 231 | (92) |
| Retained earnings | 1,643 | 3,517 |
| Total shareholders’ equity | 9,040 | 9,812 |
| Total liabilities and stockholders' equity | $23,717 | $22,536 |
| Consolidated Statement of Cash Flows | |||
|---|---|---|---|
| Year Ended May 31 (in millions) | 2019 | 2018 | |
| Cash provided by operations: | |||
| Net income | $4,029 | $1,933 | |
| Adjustments to reconcile net income to net cash provided by operations: | |||
| Depreciation | 705 | 747 | |
| Deferred income taxes | 34 | 647 | |
| Stock-based compensation | 325 | 218 | |
| Amortization and other | 15 | 27 | |
| Net foreign currency adjustments | 233 | (99) | |
| Changes in certain working capital components and other assets and liabilities: | |||
| (Increase) decrease in accounts receivable | (270) | 187 | |
| (Increase) decrease in inventories | (490) | (255) | |
| (Increase) decrease in prepaid expenses and other current and non-current assets | (203) | 35 | |
| Increase (decrease) in accounts payable, accrued liabilities and other current and non-current liabilities | 1,525 | 1,515 | |
| Cash provided by operations | 5,903 | 4,955 | |
| Cash provided (used) by investing activities: | |||
| Purchases of short-term investments | (2,937) | (4,783) | |
| Maturities of short-term investments | 1,715 | 3,613 | |
| Sales of short-term investments | 2,072 | 2,496 | |
| Additions to property, plant and equipment | (1,119) | (1,028) | |
| Disposals of property, plant and equipment | 5 | 3 | |
| Other investing activities. | -- | (25) | |
| Cash provided (used) by investing activities | (264) | 276 | |
| Cash used by financing activities: | |||
| Long-term debt payments, including current portion | (6) | (6) | |
| Increase (decrease) in notes payable | (325) | 13 | |
| Payments on capital lease and other financing obligations | (27) | (23) | |
| Proceeds from exercise of stock options and other stock issuances | 700 | 733 | |
| Repurchase of common stock | (4,286) | (4,254) | |
| Dividends—common and preferred | (1,332) | (1,243) | |
| Tax payments for net share settlement of equity awards | (17) | (55) | |
| Cash used by financing activities | (5,293) | (4,835) | |
| Effect of exchange rate changes on cash and equivalents | (129) | 45 | |
| Net increase (decrease) in cash and equivalents | 217 | 441 | |
| Cash and equivalents, beginning of year | 4,249 | 3,808 | |
| Cash and equivalents, end of year | $4,466 | $4,249 | |
(a) Compute the current ratio and quick ratio for 2018 and 2019.
Note: Round answers to two decimal places.
2019 current ratio = Answer
2018 current ratio = Answer
2019 quick ratio = Answer
2018 quick ratio = Answer
Which of the following best describes the company's current ratio
and quick ratio for 2019 and 2018?
The current ratio has increased while the quick ratio has decreased in the period from 2018 to 2019 , which suggests the company has a shortage of liquid assets.
Both the current and quick ratios have decreased from 2018 to 2019 however, the company is liquid.
Both the current and quick ratios have increased from 2018 to 2019, meaning the company is liquid.
The current ratio has decreased while the quick ratio has increased from 2018 to 2019, which suggests the company has a shortage of current assets.
(b) Compute total liabilities-to-equity ratio and total
debt-to-equity ratio for 2018 and 2019. Note:
Round answers to two decimal places.
2019 total liabilities-to-stockholders' equity = Answer
2018 total liabilities-to-stockholders' equity = Answer
2019 total debt-to-equity = Answer
2018 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
2019 and 2018?
The total liabilities-to-equity ratio has decreased while the total debt-to-equity ratio has increased in the period from 2018 to 2019, 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 remained the same in the period from 2018 to 2019, 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 2018 to 2019. These increases suggest that the company is less solvent.
Both the total liabilities-to-equity and total debt-to-equity ratios have decreased from 2018 to 2019. 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. Note: Round answers to two decimal
places.
2019 times interest earned = Answer
2018 times interest earned = Answer
2019 cash from operations to total debt = Answer
2018 cash from operations to total debt = Answer
2019 free operating cash flow to total debt = Answer
2018 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 2019 and 2018? (Select all that
apply)
Answer Nike's free operating cash flow to total debt ratio
increased over the year 2019 due to increased cash flow from
operations and a decrease in debt.
Answer Nike's times interest earned decreased during 2019, due an
increase in interest expense.
Answer Nike's cash from operations to total debt ratio increased
over the year 2019 due to an increase in cash flow from operations
and a decrease in total debt.
Answer Nike's times interest earned increased during 2019, due to
an decrease in profitability.
(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?
Nike's total debt-to-equity is low, thus increasing any immediate solvency concerns. The company's ability to meet its debt requirements will depend on increasing short-term debt.
Nike's quick ratio is low, thus increasing immediate solvency concerns. The company's ability to meet its debt requirements will depend on liquidating inventories for emergency cash.
Nike's times interest earned ratio is strong, thus lessening any immediate solvency concerns. The company's ability to meet its debt requirements will depend on its continued profitability.
Nike'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.
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