Compute and Interpret Liquidity, Solvency and Coverage Ratios
Selected balance sheet and income statement information for Nordstrom, Inc. for 2014 and 2013 follows.
| ($ millions) | 2014 | 2013 |
| Cash | $ 1,194 | $ 1,285 |
| Accounts receivable | 2,177 | 2,129 |
| Current assets | 5,228 | 5,081 |
| Current liabilities | 2,541 | 2,226 |
| Long-term debt | 3,113 | 3,131 |
| Short-term debt | 0 | 0 |
| Total liabilities | 6,494 | 6,176 |
| Interest expense | 161 | 160 |
| Capital expenditures | 803 | 513 |
| Equity | 2,080 | 1,913 |
| Cash from operations | 1,320 | 1,110 |
| Earnings before interest and taxes | 1,350 | 1,345 |
(a) Compute the following liquidity, solvency and coverage ratios for both years. (Round your answers to two decimal places.)
2014 current ratio = Answer 2.06
2013 current ratio = Answer 2.28
2014 quick ratio = Answer 1.33
2013 quick ratio = Answer 1.53
2014 liabilities-to-equity = Answer 3.12
2013 liabilities-to-equity = Answer 3.23
2014 total debt-to-equity = Answer 1.5
2013 total debt-to-equity = Answer 1.64
2014 times interest earned = Answer 8.39
2013 times interest earned = Answer 8.41
2014 cash from operations to total debt = Answer 0.42
2013 cash from operations to total debt = Answer 0.35
2014 free operating cash flow to total debt = Answer 0.17
2013 free operating cash flow to total debt = Answer 0.19
(b) Which of the following best describes the company’s credit risk?
Both the quick and current ratios for 2014 increased in the past year and are higher than 1.0, implying Nordstrom is relatively liquid. However, interest coverage ratios are high, indicating it may have difficulty making interest payments on its debt.
Both the quick and current ratios for 2014 decreased in the past year but are higher than 1.0, implying Nordstrom is relatively liquid. Interest coverage ratios are strong, indicating it has the ability to cover interest payments on its debt.
Both the quick and current ratios for 2014 decreased in the past year and are higher than 1.0, implying Nordstrom is would have difficulty converting assets to cash, if needed. However, interest coverage ratios are strong, indicating it has the ability to cover interest payments on its debt.
Both the quick and current ratios for 2014 decreased in the past year but are higher than 1.0, implying Nordstrom is relatively liquid. Interest coverage ratios are weak, indicating it may have difficulty making interest payments on its debt.