Compute and Interpret Liquidity, Solvency and Coverage Ratios

Information from the balance sheet, income statement, and statement of cash flows for Nike follows. Refer to these financial statements to answer the requirements.

NIKE, INC.

Consolidated Statements of IncomeYear Ended December 31 (In millions)20192018Revenues$39,117$36,397Cost of sales21,64320,441Gross profit17,47415,956Demand creation expense3,7533,577Operating overhead expense8,9497,934Total selling and administrative expense12,70211,511Interest expense (income), net4954Other (income) expense, net(78)66Income before income taxes4,8014,325Income tax expense7722,392Net income$ 4,029$ 1,933

Consolidated Balance SheetsMay 31 (in millions)

20192018Current AssetsCash and cash equivalents$ 4,466$ 4,249Short-term investments197996Accounts receivable, net.4,2723,498Inventories5,6225,261Prepaid expenses and other current assets1,9681,130Total current assets16,52515,134Property, plant and equipment, net4,7444,454Identifiable intangible assets, net283285Goodwill154154Deferred income taxes2,0112,509Total assets$23,717$22,536Liabilities and stockholders' equityCurrent LiabilitiesCurrent portion of long-term debt$6$6Notes payable9336Accounts payable2,6122,279Accrued pension liabilities5,0103,269Income taxes payable229150Total current liabilities7,8666,040Long-term debt3,4643,468Deferred income taxes and other liabilities3,3473,216Shareholders' equityClass A convertible315 and 329 shares outstanding----Class B1,253 and 1,272 shares outstanding33Capital in excess of stated value7,1636,384Accumulated other comprehensive income (loss)231(92)Retained earnings1,6433,517Total shareholders' equity9,0409,812Total liabilities and stockholders' equity$23,717$22,536

Consolidated Statement of Cash FlowsYear Ended May 31 (in millions)20192018

Cash provided by operations:Net income$4,029$1,933Adjustments to reconcile net income to net cash provided by operations:Depreciation705747Deferred income taxes34647Stock-based compensation325218Amortization and other1527Net foreign currency adjustments233(99)Changes in certain working capital components and other assets and liabilities:(Increase) decrease in accounts receivable(270)187(Increase) decrease in inventories(490)(255)(Increase) decrease in prepaid expenses and other current and non-current assets(203)35Increase (decrease) in accounts payable, accrued liabilities and other current and non-current liabilities1,5251,515Cash provided by operations5,9034,955Cash provided (used) by investing activities:Purchases of short-term investments(2,937)(4,783)Maturities of short-term investments1,7153,613Sales of short-term investments2,0722,496Additions to property, plant and equipment(1,119)(1,028)Disposals of property, plant and equipment53Other investing activities.--(25)Cash provided (used) by investing activities(264)276Cash used by financing activities:Long-term debt payments, including current portion(6)(6)Increase (decrease) in notes payable(325)13Payments on capital lease and other financing obligations(27)(23)Proceeds from exercise of stock options and other stock issuances700733Repurchase of common stock(4,286)(4,254)Dividendscommon and preferred(1,332)(1,243)Tax payments for net share settlement of equity awards(17)(55)Cash used by financing activities(5,293)(4,835)Effect of exchange rate changes on cash and equivalents(129)45Net increase (decrease) in cash and equivalents217441Cash and equivalents, beginning of year4,2493,808Cash and equivalents, end of year$4,466$4,249

(a) Compute the current ratio and quick ratio for 2018 and 2019.Note:Round answers to two decimal places.

2019current ratio =Answer

2018 current ratio =Answer

2019quick ratio =Answer

2018quick ratio =Answer

Which of the following best describes the company's current ratio and quick ratio for 2019and 2018?

The current ratio has increased while the quick ratio has decreased in the period from 2018 to 2019, which suggests the company has a shortage of liquid assets.

Both the current and quick ratios havedecreased from 2018to 2019however, the company isliquid.

Both the current and quick ratios haveincreased from 2018to 2019, meaning the company isliquid.

The current ratio has decreased while the quick ratio has increased from 2018to 2019, which suggests the company has a shortage of current assets.

(b) Compute total liabilities-to-equity ratio and total debt-to-equity ratio for 2018 and 2019.Note:Round answers to two decimal places.

2019total liabilities-to-stockholders' equity =Answer

2018total liabilities-to-stockholders' equity =Answer

2019totaldebt-to-equity =Answer

2018total debt-to-equity =Answer

Which of the following best describes the company's total liabilities-to-equity ratios and totaldebt-to-equity ratios for 2019and 2018?

The total liabilities-to-equity ratio has decreased while thetotal debt-to-equity ratio has increased in the period from 2018to 2019, which suggests the company has decreased the use of short-term debt financing.

The total liabilities-to-equity ratio has increased while the totaldebt-to-equity ratio remained the same in the period from 2018to 2019, which suggests the company has increased the use of short-term debt financing.

Both the total liabilities-to-equity and total debt-to-equity ratios have increased from 2018to 2019. These increases suggest that the company is less solvent.

Both the total liabilities-to-equity and total debt-to-equity ratios have decreased from 2018to 2019. The difference between these two measures reveals that any solvency concerns would be for the short run.

(c) Compute times interest earned ratio, cash from operations to total debt ratio, and free operating cash flow to total debt ratios.Financial statements included the following footnote: "Included in Interest expense (income), net was interest income related to the Company's investment portfolio of $82 million and $70 million for the years ended May 31, 2019 and 2018, respectively."Note:Round answers to two decimal places.

2019times interest earned =Answer

2018times interest earned =Answer

2019cash from operations to total debt =Answer

2018cash from operations to total debt =Answer

2019free operating cash flow to total debt =Answer

2018free operating cash flow to total debt =Answer

Which of the following describes the company's times interest earned, cash from operations to total debt, and free operating cash flow to total debt ratios for 2019and 2018? (Select all that apply)

Answer

yes

no

Nike's free operating cash flow to total debt ratio increased over the year 2019due to increased cash flow from operations and a decrease in debt.

Answer

yes

no

Nike's times interest earneddecreased during 2019, duean increase in interest expense.

Answer

yes

no

Nike's cash from operations to total debt ratio increased over the year 2019due to an increase in cash flow from operations and a decrease intotal debt.

Answer

yes

no

Nike's times interest earned increased during 2019, due toan decrease in profitability.

(d) Summarize your findings in a conclusion about the company's credit risk. Do you have any concerns about the company's ability to meet its debt obligations?

Nike'stotal debt-to-equity islow, thus increasing any immediate solvency concerns. The company's ability to meet its debt requirements will depend on increasing short-term debt.

Nike's quick ratio islow, thus increasing immediate solvency concerns. The company's ability to meet its debt requirements will depend on liquidating inventories for emergency cash.

Nike's times interest earned ratio is strong, thus lessening any immediate solvency concerns. The company's ability to meet its debt requirements will depend on its continued profitability.

• Nike's total liabilities-to-equity is high, thus lessening any immediate solvency concerns. The company's ability to meet its debt requirements will depend on its use of equity financing.