The following ratios have been calculated for Wholesale Appliances, Inc. Analyze
ID: 2798480 • Letter: T
Question
The following ratios have been calculated for Wholesale Appliances, Inc. Analyze the capital structure and long-term solvency of Wholesale Appliances, Inc.
2015 2016
Debt ratio (%) 77.8 90.3
Long-term debt to total capital (%) 29.8 66.1
Times interest earned (times) (2.0) (2.8)
Cash interest coverage (times) 4.6 4.1
Fixed charge coverage (times) (0.4) (1.0)
Cash flow adequacy (times) 0.2 0.3
Explanation / Answer
A measurement of financial risk in a company is the composition of its Capital Structure. It can be shown be by preparing a common-size financial statement of the liabilities and equity segment of the balance sheet.
Moreover, the marketing changes and trends for the 2016 are to be analyzed. Wholesale Appliances has a uncertain capital structure, however it has increased from 2015 to 2016 . The significant increase in debt seems to be largely a enhance in long-term debt.The debt ratio less than 100% indicates that a firm has more assets than debt. The higher the proportion of debt, the larger the fixed charges of interest and debt repayment and greater the insolvency. The times interest earned and fixed charge coverage ratios are negative because the firm is running into loss although the firm cannot cover up fixed payments with profit, they can cover up these things with cash. The cash interest coverage ratio is positive both years but decreased in 2016 however an interest coverage ratio of at least 2 is an acceptable measure for the investor to calculate the company position as solid. Since Cash flow adequacy is higher in 2016 than the 2015 and has increased from 0.2 to 0.3 . This shows that the firm is generating the enough cash flow towards payments made for fixed assets acquisition & capital expenditures, long term debt payments and distributed cash dividends to shareholders from operations. As per the rule, a firm should aim to have a cash flow adequacy ratio of 1 or above which able to meet the financial obligation of the company .The increase in cash flow adequacy ratio is a outcome that Wholesale Appliance cover its long-term debts and financial obligations in the same year itself which shows a positive indicator for future growth of business and an investor can predict the good business growth from this ratio analysis.
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