Compute and Interpret Liquidity and Solvency Ratios ed balance sheet and income

Question

Compute and Interpret Liquidity and Solvency Ratios ed balance sheet and income statement information from Comcast Corporation for 2015 and Select 2014 follows (S millions). Income Before Interest Total Current Total Current and Interest Total Equity Assets Liabilities Taxes Expense Liabilities* 2015... .$12,303 $18,178 $15,673 $2,702 $112,596 2014.... 13,531 $53,978 53,068 17,410 15,001 2,617 106,118 Includes redeemable noncontrolling interests a. Compute the current ratio for each year and discuss any trend in liquidity. Do you believe the com- pany is sufficiently liquid? Explain. What additional information about the accounting numbers comprising this ratio might be useful in helping you assess liquidity? Explain. ticeable change. a and b? Explain. Hint: Compare the ratios for Comcast to those provided in the module for publicly b. Compute times interest earned and the liabilities-to-equity ratio for each year and discuss any no- C. What is your overall assessment of the company's liquidity and solvency fronm the analyses in parts traded companies.

Explanation / Answer

A. Current Ratio is used to determine a company's ability to pay it's upcoming obligations. Current ratio is computed by dividing Current Assets by Current Liabilities.

Current Assets usually include all the current assets like Marketable securities, Short-term investments,Cash and Cash equivalents, Inventory, Account receivable etc. while Current Liabilities may include short term debt obligations, Accounts Payable etc.

In the above question, Current Ratio would appear as below:

Interpretation: Company's current ratio for 2015 is deteriorating as compared to previous year. Company's current assets are not enough to pay the current liabilities. Company may face financial crunches in near term if the ratio is not improved. Remember, More the Current ratio, better it is for company. Since Current Assets include the prepaid expenses, book value of inventory as well which may not materialize at the stated price in Balance Sheet. Real analysis can be done if Bifurcation of All the current assets and current liabilities are available so that non- realized value of assets OR non-payable value of Liabilites can be ignored to reach at real current ratio. As per Universal acceptance, a current ratio of 2:1 is considered better which basically means Current Assets are double of Current Liabilities which means Company have enough funds to meet its obligations in near future. Please note, 2:1 is not recognised for every Industry, It again depends on the nature of work company is involved in.

B. Times Interest Earned (also called Interest coverage ratio) explains the company's ability to honor its debt payments. Lenders always look at this ratio for assurance about debt servicing in future. Liabilities to Equity ratio(also called debt-equity ratio) explains how much of the company's debt has been used to finance the assets in relative to Equity. For a ratio of 0.7:1, One can interpret: For every $1 of equity, Company has raised $0.7 of debt and the total assets(Asset side of balance Sheet) would appear as $1.7(1+0.7).

Interpretation: Copmay is heavily debt ridden and is finding difficult to improve it's Liabilities to Equity ratio. Though Company's Times interest earned ratio is improved to some extent but it would not be right to say company is doing well operationally to meet it's interest obligations.

C. As stated in part A, Company's current ratio isn't good in both the years. Company may face some financial issues in near future since current assets are short of current liabilities by considerable amount. Company may raise new equity or loan but availing loan at a decent rate from market is also a difficult task since Interest coverage ratio and Liabilities to equity ratio doesn't depict a good picture. For further solvency, company needs to look on It's quick ratio which is another purified version of current ratio where all the assets which aren't easily liquidable in market are ignored.

Year 2015 2014 Total Current Assets 12,303 13,531 Total Current Liabilities 18,178 17,410 Current Ratio 0.68 0.78

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