University of Phoenix
October 10, 2011
Week Two Discussion Questions
•Visit the website of your favorite U.S. company. Find the company’s financial statements in the section of the website for investors. Post a link to the statements. Compute two ratios from each type, including liquidity, solvency, and profitability. What do these ratios tell you about the financial status of this company?
Mattel Annuals reports:
Liquidity ratios show the company’s ability to turn short-term assets into cash to cover debts in the short term. Creditors are most interested in the liquidity ratios to determine a company’s ability to pay debts. Common liquidity ratios include current ratio and quick ratio. i.Current Ratio:
Current Ratio = Total Current Assets/ Total Current Liabilities
Quick Ratio = Total Quick Assets/Total Current Liabilities
Total Quick Assets = Total Assets – Inventory
Quick Ratio = 2531.1- 783.5/898.6
Solvency ratios show the company’s ability to meet long-term obligations. Solvency ratios measure the size of a company’s income excluding non-cash depreciation expenses. Solvency ratios include debt ratio and times interest earned ratio. i.Debt Ratio:
Debt Ratio = Total Liabilities / Total Assets
Zero debt ratio indicates the company assets are not financed by any debts.
ii.Times Interest Earned Ratio:
Times Interest = Earnings Before Interest & Tax / Interest
= 94.9 + 17.6/17.6
= 6.4 times
Profitability ratios show the company’s ability to generate earnings as compared to its expenses and other relevant costs...