Compute and Interpret Liquidity, Solvency and Coverage Ratios | Lockheed Martin Corporation

Compute and Interpret Liquidity, Solvency and Coverage RatiosBalance sheets and income statements for Lockheed Martin Corporation follow.

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 27,932 27,637 25,306
Service 5,073 4,765 4,099
Unallocated coporate costs 803 914 443
  33,808 33,316 29,848
  3,405 2,210 1,976
Other income (expenses), net (449) (121) 43
Operating profit 2,956 2,089 2,019
Interest expense 370 425 487
Earnings before taxes 2,586 1,664 1,532
Income tax expense 761 368 479
Net earnings $ 1,825 $ 1,296 $ 1,053

Balance Sheet

December 31 (In millions) 2005 2004
Assets    
Cash and cash equivalents $ 2,124 $ 1,080
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 10,409 8,973
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 $ 27,624 $ 25,574
     
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 4,944 5,184
Accrued pension liabilities 1,617 1,760
Other postretirement benefit liabilities 1,277 1,236
Other liabilities 2,491 1,807
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 $ 27,624 $ 25,574

 

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 (784) (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 (719) (708) (1,461)
Financing Activities      
repayment of long-term debt (53) (1,069) (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 (1,431) (2,146) (2,076)
Net increase (decrease) in cash and cash equivalents 1,044 70 (1,728)
Cash and cash equivalents at beginning of year 1,080 1,010 2,738
Cash and cash equivalents at end of year $ 2,124 $ 1,080 $ 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 1.1

2004 current ratio = Answer 1.05

2005 quick ratio = Answer 0.9002

2004 quick ratio = Answer 0.829

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 increased from 2004 to 2005. The company is fairly liquid.

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

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 2.51

2004 total liabilities-to-stockholders’ equity = Answer 2.64

2005 total debt-to-equity = Answer 1.2

2004 total debt-to-equity = Answer 1.22

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 decreased from 2004 to 2005. The difference between these two measures reveals that any solvency concerns would be for the short run.

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.

(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 7.99

2004 times interest earned = Answer 4.92

2005 cash from operations to total debt = Answer 0.08

2004 cash from operations to total debt = Answer 0.04

2005 free operating cash flow to total debt = Answer 0.16

2004 free operating cash flow to total debt = Answer 0.16

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)

Answer = no

Lockheed Martin’s times interest earned decreased significantly during 2005, due to both a decrease in profitability and an increase in interest expense.
Answer = yes

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.
Answer = yes

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.
Answer = yes

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 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 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 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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