Kabutell, Inc. had net income of $750,000, cash flow from financing activities o

Question

Kabutell, Inc. had net income of $750,000, cash flow from financing activities of $50,000, depreciation expenses of $50,000 and cash flow from operating activities of $575,000

Calculate the quality of earnings ratio. What does this ratio tell you?

Kabutell, Inc. reported the following in its annual report for 2011-2013

($ million)                 2011                  2012                2013

ash Flow form Operations      $478                  $403               $470

Capital Expenditures (CAPEX)     $459                    $477             $456

Calculate the average capital acquisitions ratio over the three-year period. How would you interpret these results?

What is Kabutells quality of earnings ratio?

Explanation / Answer

Quality of earnings ratio = (cash from operations) / (net income). This equation yields a ratio that shows the extent to which a company can verify its reported income through hard operational earnings rather than through aggressive accounting methods. Quality of earning ratio 0.766666667 High numbers show a high quality of earnings 2011 2012 2013 Cashflow from operations 478 403 470 CAPEX 459 477 456 Capital acquasition ratio 1.041394 0.844864 1.030702 Capital Acquisition Ratio = (cash flow from operations - dividends) / cash paid for acquisitions. The capital acquisition ratio reflects the company's ability to finance capital expenditures from internal sources. A ratio of less than 1:1 (100 %) indicates that capital acquisitions are draining more cash from the business than they are generating revenues.

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