Accounting Project Analyzing Long-Term Firm Solvency a. Debt-to-equity ratio b. time-interest - earned ratio. ** C. Operating cash flow-to-capital-expenditures ratio For each ratio site, the definition of the ratio, the purpose of the ratio and the type of information the ratio is designed to Communicate. Once all the ratios are completed prepare a result of analysis section below the ratios and discuss what the ratios tell about the company as it relates to : a. Firm Profitability b. short term liquidity c. Long term solvency d. Common Stockholders ** use $13,900 for operating cash flows in 2018 and $ 14,800 in 2017. Debt-to- Equity ratio = total Liabilities / Total Stockholders Equity Times - Interest- Earned Ratio = earnings before interest and tax / interest expense. Operating cash flow-to-capital- expenditures ratio = cash provided by operating activities / capital expenditures The Cullen Company Balance Statements (in millions) 2018 2017 $ 5,947 Assets Current Assets Cash and cash equivalents Short-term investments Accounts receivable Inventories Other current assets Total current assets Property, plant and equipment, net Intangible assets Other noncurrent assets Total assets $ 8,558 2,128 6,386 6,759 7,786 31,617 22,304 84,547 5,798 $ 144,266 6,508 6,909 4,626 23,990 21,666 86,760 6,847 $ 139,263 Liabilities and Stockholders' Equity Current Liabilities Accounts payable Other current liabilities Total current liabilities Long-term debt Other non-current liabilities Total liabilities Preferred Stock Common Stock Additional paid-in capital Treasury stock Retained earnings Total Stockholders' equity Total liabilities and stockholders' equity 8,461 8,999 16,266 33,726 19,811 20,753 74,290 1,111 4,009 63,911 (71,966) 84,990 82,055 $ 156,345 $ 8,777 8,828 12,432 30,037 19,111 21,406 70,554 1,137 4,009 63,538 (71,966) 80,197 76,915 $ 147,469 The Cullen Company Income Statements (in millions) Net sales Cost of goods sold Year Ended 2018 $83,062 42,460 Year Ended 2017 $82,581 41,391 40,602 41,190 Gross profit Selling, general, and administrative expense 25,314 26,552 Operating income Interest expense Other non-operating income (expense) 15,288 709 100 14,638 667 942 Earnings from operations before taxes Income taxes expense 14,679 3,178 14,913 3,391 Net earnings $11,501 $11,522 2,851,980 2,851,980 Shares outstanding $ $ 2.35 2.30 Dividends per share Debt-to-Equity Ratio The debt-to-equity ratio evaluates the financial structure of a firm by relating a com- pany's total liabilities to its total stockholders' equity. This ratio considers the extent to which a company relies on creditors versus stockholders to provide financing. The debt- to-equity ratio is calculated as follows: Debt-to-equity ratio Total liabilities Total stockholders' equity This ratio uses year-end balances for the ratio's components, rather than averages, since we are interested in the firm's capital structure as of a particular point in time. The total stockholders' equity for a business is its total assets minus its total liabilities. The debt-to-equity ratio gives creditors an indication of the margin of protection available to them (creditors' claims to assets have priority over stockholders' claims). The lower the ratio, the greater the protection being provided to creditors. A firm with a low ratio also has greater flexibility when seeking additional borrowed funds at a low rate of interest than does a firm with a high ratio. P&G's debt-to-equity ratio is calculated as: 2017 2016 Total liabilities (year-end) Total stockholders' equity (year-end) Debt-to-equity ratio Industry average... $64,628 $69,153 55,778 57,983 1.16 1.19 0.42 P&G's debt-to-equity ratio decreased slightly from 1.19 in 2016 to 1.16 in 2017, indicat- ing a small decrease in reliance on debt to finance its operations. However, the company's 2017 ratio is well above the industry average, suggesting an increased risk of insolvency. Still, this ratio is far from a point where it would represent a major concern. Increased risk of insolvency. here it would represent a major concem. Times-Interest-Earned Ratio To evaluate the ability of a company to pay its current interest charges, an analyst may AL investigate the relationship between the company's current interest charges and its operat- ing income available to meet interest charges. For example, an extremely high debt-to-ele equity ratio for a company may indicate extensive borrowing by the company, however, if its operating earnings are sufficient to meet the interest charges on the debt several times over, an analyst may regard the situation quite favorably. Analysts, particularly long-term credit analysts, almost always consider the times- interest-earned ratio of a company with interest-bearing debt. This ratio is calculated by dividing the income before interest expense and income taxes by the annual interest expense: inter Times-interest- _ Income before interest expense and income taxes earned ratio Interest expense P&G's times-interest-earned ratio is calculated as: Income before interest expense and income taxes Interest expense.. Times-interest-earned ratio. Industry average.... 2017 2016 $13,722 $13,948 465 579 29.5 24.1 40.1 ... ... P&G's operating income available to meet its interest charges increased from 24.1 times in 2016 to 29.5 times in 2017. This ratio is below the industry average of 40.1, but still indicates that P&G exhibits an exceptionally good margin of safety for creditors. Gener- ally speaking, a company that earns its interest charges several times over is regarded as a satisfactory risk by long-term creditors. Operating-Cash-Flow-to-Capital-Expenditures Ratio The ability of a firm's operations to provide sufficient cash to replace and expand its property, plant, and equipment is revealed by the operating-cash-flow-to-capital- expenditures ratio. To the extent that acquisitions of plant assets can be financed using cash provided by operating activities, a firm does not have to use other financing sources, such as long-term debt. This ratio is calculated as follows: Operating-cash-flow-to- capital-expenditures ratio Cash flow from operating activities Annual net capital expenditures A ratio of 1.0 indicates that a firm's current operating activities provide sufficient cash to fully fund any investment in plant capacity. A ratio in excess of 1.0 indicates that a company has sufficient operating cash flow to fund expansion in its plant capacity. The operating-cash-flow-to-capital-expenditures ratio for P&G is: Cash flow from operating activities. Annual net capital expenditures. Operating-cash-flow-to-capital-expenditures ratio 2017 2016 $12,753 $15,435 2,813 2,882 4.5 54 In 2017, P&G's operating-cash-flow-to capital-expenditures ratio was 4.5, a slight de- crease from 5.4 in 2016. It appears that P&G is generating plenty of operating cash flow to cover its net capital expenditures in each year. The Cullen Company Balance Statements (in millions) 2018 2017 $ 5,947 Assets Current Assets Cash and cash equivalents Short-term investments Accounts receivable Inventories Other current assets Total current assets Property, plant and equipment, net Intangible assets Other noncurrent assets Total assets $ 8,558 2,128 6,386 6,759 7,786 31,617 22,304 84,547 5,798 $ 144,266 6,508 6,909 4,626 23,990 21,666 86,760 6,847 $ 139,263 Liabilities and Stockholders' Equity Current Liabilities Accounts payable Other current liabilities Total current liabilities Long-term debt Other non-current liabilities Total liabilities Preferred Stock Common Stock Additional paid-in capital Treasury stock Retained earnings Total Stockholders' equity Total liabilities and stockholders' equity 8,461 8,999 16,266 33,726 19,811 20,753 74,290 1,111 4,009 63,911 (71,966) 84,990 82,055 $ 156,345 $ 8,777 8,828 12,432 30,037 19,111 21,406 70,554 1,137 4,009 63,538 (71,966) 80,197 76,915 $ 147,469 Accounting Project Analyzing Long-Term Firm Solvency a. Debt-to-equity ratio b. time-interest - earned ratio. ** C. Operating cash flow-to-capital-expenditures ratio For each ratio site, the definition of the ratio, the purpose of the ratio and the type of information the ratio is designed to Communicate. Once all the ratios are completed prepare a result of analysis section below the ratios and discuss what the ratios tell about the company as it relates to : a. Firm Profitability b. short term liquidity c. Long term solvency d. Common Stockholders ** use $13,900 for operating cash flows in 2018 and $ 14,800 in 2017. Debt-to- Equity ratio = total Liabilities / Total Stockholders Equity Times - Interest- Earned Ratio = earnings before interest and tax / interest expense. Operating cash flow-to-capital- expenditures ratio = cash provided by operating activities / capital expenditures The Cullen Company Balance Statements (in millions) 2018 2017 $ 5,947 Assets Current Assets Cash and cash equivalents Short-term investments Accounts receivable Inventories Other current assets Total current assets Property, plant and equipment, net Intangible assets Other noncurrent assets Total assets $ 8,558 2,128 6,386 6,759 7,786 31,617 22,304 84,547 5,798 $ 144,266 6,508 6,909 4,626 23,990 21,666 86,760 6,847 $ 139,263 Liabilities and Stockholders' Equity Current Liabilities Accounts payable Other current liabilities Total current liabilities Long-term debt Other non-current liabilities Total liabilities Preferred Stock Common Stock Additional paid-in capital Treasury stock Retained earnings Total Stockholders' equity Total liabilities and stockholders' equity 8,461 8,999 16,266 33,726 19,811 20,753 74,290 1,111 4,009 63,911 (71,966) 84,990 82,055 $ 156,345 $ 8,777 8,828 12,432 30,037 19,111 21,406 70,554 1,137 4,009 63,538 (71,966) 80,197 76,915 $ 147,469 The Cullen Company Income Statements (in millions) Net sales Cost of goods sold Year Ended 2018 $83,062 42,460 Year Ended 2017 $82,581 41,391 40,602 41,190 Gross profit Selling, general, and administrative expense 25,314 26,552 Operating income Interest expense Other non-operating income (expense) 15,288 709 100 14,638 667 942 Earnings from operations before taxes Income taxes expense 14,679 3,178 14,913 3,391 Net earnings $11,501 $11,522 2,851,980 2,851,980 Shares outstanding $ $ 2.35 2.30 Dividends per share Debt-to-Equity Ratio The debt-to-equity ratio evaluates the financial structure of a firm by relating a com- pany's total liabilities to its total stockholders' equity. This ratio considers the extent to which a company relies on creditors versus stockholders to provide financing. The debt- to-equity ratio is calculated as follows: Debt-to-equity ratio Total liabilities Total stockholders' equity This ratio uses year-end balances for the ratio's components, rather than averages, since we are interested in the firm's capital structure as of a particular point in time. The total stockholders' equity for a business is its total assets minus its total liabilities. The debt-to-equity ratio gives creditors an indication of the margin of protection available to them (creditors' claims to assets have priority over stockholders' claims). The lower the ratio, the greater the protection being provided to creditors. A firm with a low ratio also has greater flexibility when seeking additional borrowed funds at a low rate of interest than does a firm with a high ratio. P&G's debt-to-equity ratio is calculated as: 2017 2016 Total liabilities (year-end) Total stockholders' equity (year-end) Debt-to-equity ratio Industry average... $64,628 $69,153 55,778 57,983 1.16 1.19 0.42 P&G's debt-to-equity ratio decreased slightly from 1.19 in 2016 to 1.16 in 2017, indicat- ing a small decrease in reliance on debt to finance its operations. However, the company's 2017 ratio is well above the industry average, suggesting an increased risk of insolvency. Still, this ratio is far from a point where it would represent a major concern. Increased risk of insolvency. here it would represent a major concem. Times-Interest-Earned Ratio To evaluate the ability of a company to pay its current interest charges, an analyst may AL investigate the relationship between the company's current interest charges and its operat- ing income available to meet interest charges. For example, an extremely high debt-to-ele equity ratio for a company may indicate extensive borrowing by the company, however, if its operating earnings are sufficient to meet the interest charges on the debt several times over, an analyst may regard the situation quite favorably. Analysts, particularly long-term credit analysts, almost always consider the times- interest-earned ratio of a company with interest-bearing debt. This ratio is calculated by dividing the income before interest expense and income taxes by the annual interest expense: inter Times-interest- _ Income before interest expense and income taxes earned ratio Interest expense P&G's times-interest-earned ratio is calculated as: Income before interest expense and income taxes Interest expense.. Times-interest-earned ratio. Industry average.... 2017 2016 $13,722 $13,948 465 579 29.5 24.1 40.1 ... ... P&G's operating income available to meet its interest charges increased from 24.1 times in 2016 to 29.5 times in 2017. This ratio is below the industry average of 40.1, but still indicates that P&G exhibits an exceptionally good margin of safety for creditors. Gener- ally speaking, a company that earns its interest charges several times over is regarded as a satisfactory risk by long-term creditors. Operating-Cash-Flow-to-Capital-Expenditures Ratio The ability of a firm's operations to provide sufficient cash to replace and expand its property, plant, and equipment is revealed by the operating-cash-flow-to-capital- expenditures ratio. To the extent that acquisitions of plant assets can be financed using cash provided by operating activities, a firm does not have to use other financing sources, such as long-term debt. This ratio is calculated as follows: Operating-cash-flow-to- capital-expenditures ratio Cash flow from operating activities Annual net capital expenditures A ratio of 1.0 indicates that a firm's current operating activities provide sufficient cash to fully fund any investment in plant capacity. A ratio in excess of 1.0 indicates that a company has sufficient operating cash flow to fund expansion in its plant capacity. The operating-cash-flow-to-capital-expenditures ratio for P&G is: Cash flow from operating activities. Annual net capital expenditures. Operating-cash-flow-to-capital-expenditures ratio 2017 2016 $12,753 $15,435 2,813 2,882 4.5 54 In 2017, P&G's operating-cash-flow-to capital-expenditures ratio was 4.5, a slight de- crease from 5.4 in 2016. It appears that P&G is generating plenty of operating cash flow to cover its net capital expenditures in each year. The Cullen Company Balance Statements (in millions) 2018 2017 $ 5,947 Assets Current Assets Cash and cash equivalents Short-term investments Accounts receivable Inventories Other current assets Total current assets Property, plant and equipment, net Intangible assets Other noncurrent assets Total assets $ 8,558 2,128 6,386 6,759 7,786 31,617 22,304 84,547 5,798 $ 144,266 6,508 6,909 4,626 23,990 21,666 86,760 6,847 $ 139,263 Liabilities and Stockholders' Equity Current Liabilities Accounts payable Other current liabilities Total current liabilities Long-term debt Other non-current liabilities Total liabilities Preferred Stock Common Stock Additional paid-in capital Treasury stock Retained earnings Total Stockholders' equity Total liabilities and stockholders' equity 8,461 8,999 16,266 33,726 19,811 20,753 74,290 1,111 4,009 63,911 (71,966) 84,990 82,055 $ 156,345 $ 8,777 8,828 12,432 30,037 19,111 21,406 70,554 1,137 4,009 63,538 (71,966) 80,197 76,915 $ 147,469