Winter 2017
University of Rochester
Provide insight into the mix of debt and equity in a firms capital structure
(there are numerous other ratios in this category).
Solvency and COVERAGE RATIOS 31-Jan-2014 31-Jan-2013 31-Jan-2012 31-Jan-2011 31-Jan-2010 31-Jan-2009 31-Jan-2008 31-Jan-2007 31-Jan-2006
LTD / (LTD +SE) 36.9% 35.2% 39.8% 39.0% 34.1% 34.6% 34.1% 33.3% 36.1%
LTD / SE 58.4% 54.3% 66.0% 64.0% 51.7% 52.9% 51.7% 49.9% 56.6%
TOTAL LIABILITIES / TOTAL ASSETS 62.8% 62.4% 63.1% 62.1% 58.6% 60.1% 60.5% 59.4% 61.5%
TOTAL LIABILITIES / STOCK EQUITY 168.5% 166.0% 171.2% 163.8% 141.8% 150.3% 153.1% 146.2% 159.9%
SE / TOTAL ASSETS 37.2% 37.6% 36.9% 37.9% 41.4% 39.9% 39.5% 40.6% 38.5%
DEBT-TO-EQUITY RATIO 74.3% 70.9% 74.9% 72.7% 58.6% 64.7% 69.1% 63.4% 72.8%
NET DEBT-TO EQUITY RATIO 64.7% 60.7% 65.7% 62.0% 47.4% 53.5% 60.6% 50.8% 61.2%
DEBT-TO-CAPITAL RATIO 42.6% 41.5% 42.8% 42.1% 37.0% 39.3% 40.9% 38.8% 42.1%
NET DEBT-TO-NET CAPITAL RATIO 39.3% 37.8% 39.7% 38.3% 32.2% 34.9% 37.7% 33.7% 38.0%
OCF TO TL RATIO 18.2% 20.6% 20.7% 22.3% 26.5% 23.5% 21.9% 23.1% 23.4%
INTEREST COVERAGE (EARNINGS BASIS) 11.51 12.33 11.42 11.58 11.62 10.42 10.44 11.33 13.18
INTEREST COVERAGE (CASH BASIS) 14.50 15.54 13.85 15.16 16.71 17.64 17.61 18.32 18.41
COMMON SHARES REPURCHASES TO OCF 0.29 0.30 0.26 0.62 0.28 0.15 0.37 0.08 0.20
OCF TO CAPEX RATIO 1.77 1.98 1.80 1.86 2.15 2.01 1.38 1.29 1.26
Prof. Charles E. Wasley 10
Targets Liquidity and Capital
Structure Ratios
LIQUIDITY RATIOS 01-Feb-2014 02-Feb-2013 28-Jan-2012 29-Jan-2011 30-Jan-2010 31-Jan-2009 02-Feb-2008 03-Feb-2007 28-Jan-2006
CURRENT RATIO 0.91 1.17 1.15 1.71 1.63 1.66 1.60 1.32 1.50
QUICK RATIO 0.05 0.06 0.47 0.78 0.81 0.85 0.89 0.63 0.76
CASH RATIO 0.05 0.05 0.04 0.06 0.05 0.05 0.05 0.07 0.17
OCF TO CL RATIO 0.49 0.38 0.45 0.49 0.54 0.40 0.36 0.47 0.50
Solvency and COVERAGE RATIOS 01-Feb-2014 02-Feb-2013 28-Jan-2012 29-Jan-2011 30-Jan-2010 31-Jan-2009 02-Feb-2008 03-Feb-2007 28-Jan-2006
LTD / (LTD +SE) 44.5% 47.3% 46.5% 50.2% 49.6% 56.1% 49.7% 35.7% 39.1%
LTD / SE 80.1% 89.6% 86.9% 100.8% 98.5% 127.6% 98.8% 55.5% 64.2%
TOTAL LIABILITIES / TOTAL ASSETS 64.2% 65.9% 66.2% 64.6% 65.5% 68.9% 65.6% 58.1% 59.4%
TOTAL LIABILITIES / STOCK EQUITY 179.7% 193.3% 195.4% 182.2% 190.2% 221.7% 191.1% 138.9% 146.4%
SE / TOTAL ASSETS 35.8% 34.1% 33.8% 35.4% 34.5% 31.1% 34.4% 41.9% 40.6%
DEBT-TO-EQUITY RATIO 87.4% 107.9% 110.9% 101.5% 109.6% 136.8% 111.6% 64.2% 69.5%
NET DEBT-TO EQUITY RATIO 83.0% 103.1% 105.9% 90.5% 95.2% 130.5% 95.6% 59.0% 57.9%
DEBT-TO-CAPITAL RATIO 46.6% 51.9% 52.6% 50.4% 52.3% 57.8% 52.8% 39.1% 41.0%
NET DEBT-TO-NET CAPITAL RATIO 45.4% 50.8% 51.4% 47.5% 48.8% 56.6% 48.9% 37.1% 36.7%
OCF TO TL RATIO 21.8% 17.1% 18.4% 18.4% 19.7% 14.9% 16.2% 22.9% 22.2%
INTEREST COVERAGE (EARNINGS BASIS) 5.56 7.05 6.12 6.91 5.81 4.92 7.89 8.49 8.20
INTEREST COVERAGE (CASH BASIS) 8.06 9.94 9.02 9.68 9.60 7.68 10.26 12.45 13.60
COMMON SHARES REPURCHASES TO OCF 0.22 0.35 0.34 0.47 0.07 0.64 0.60 0.19 0.27
OCF TO CAPEX RATIO 1.89 1.62 1.24 2.48 3.40 1.25 0.94 1.24 1.31
Prof. Charles E. Wasley 11
Financial Distress and the Risk of
Default
Why?
The distribution of each ratio is computed using all public firms over a 20-
year period (excluding banks, insurance firms and real estate firms
because their financial characteristics are so different from the majority of
firms).
For each ratio, the data are sorted into 10 equal-sized groups, called
deciles.
The graphs plot the frequency that firms in each decile defaulted over the
next five years.
Each figure also shows the cutoffs for each decile (just above the axis),
for example the line between decile 5 and 6 is the median value of the
ratio for the entire sample.
Scores between 1.81 and 3.00 are a gray area (no prediction).
INPUT: STOCK PRICE AT FISCAL YEAR END $78.69 $69.95 $61.36 $56.07 $53.43 $47.12 $50.74 $47.69 $46.11
INPUT: SHARES OUTSTANDING FISCAL YEAR END 3,235,772 3,345,238 3,424,697 3,561,994 3,810,172 3,922,552 4,004,809 4,168,025 4,163,490
MARKET VALUE OF EQUITY IN DOLLARS $254,622,899 $233,999,398 $210,139,408 $199,721,004 $203,577,490 $184,830,650 $203,204,009 $198,773,112 $191,978,524
MARKET VALUE OF EQUITY/BOOK VALUE OF LIABILITIES 1.982 1.846 1.721 1.779 2.037 1.883 2.055 2.208 2.258
SALES/TOTAL ASSETS 2.326 2.307 2.309 2.333 2.395 2.474 2.306 2.298 2.259
Z-SCORE =============================> 4.424 4.298 4.245 4.319 4.574 4.561 4.396 4.544 4.514
INPUT: STOCK PRICE AT FISCAL YEAR END $63.27 $60.41 $50.81 $54.83 $51.27 $31.20 $55.42 $61.36 $54.75
INPUT: SHARES OUTSTANDING FISCAL YEAR END 632,088 650,794 671,597 708,082 752,313 752,780 830,845 858,887 879,184
MARKET VALUE OF EQUITY IN DOLLARS $39,992,208 $39,314,466 $34,123,844 $38,824,136 $38,571,088 $23,486,736 $46,045,430 $52,701,306 $48,135,324
Z-SCORE =============================> 3.145 3.087 2.987 3.367 3.205 2.819 3.350 4.115 3.950
INTWO = 1 if net income is negative for the last two years and 0 otherwise
Target: y = -5.037
p(bankruptcy) = 1 / (1+ e-(-5.037)) = 0.645%.
The probability of Target going bankrupt is very small.
SIZE =TOTAL ASSETS / GNP IMPLICIT PRICE DEFLATOR 19.826 19.835 19.806 19.757 19.703 19.677 19.697 19.683 19.621
TL/TA = TOTAL LIABILITIES/TOTAL ASSETS 0.628 0.624 0.631 0.621 0.586 0.601 0.605 0.594 0.615
CLCA = CURRENT LIABILITIES / CURRENT ASSETS 1.133 1.198 1.133 1.127 1.156 1.132 1.218 1.110 1.114
NITA = NET INCOME / TOTAL ASSETS 0.078 0.084 0.081 0.091 0.084 0.082 0.078 0.074 0.081
THE VALUE OF "y" IS: -5.987 -6.042 -5.973 -6.121 -6.265 -6.148 -6.074 -6.136 -6.018
OHLSON'S PROBABILITY OF BANKRUPTCY IS: 0.251% 0.237% 0.254% 0.219% 0.190% 0.213% 0.230% 0.216% 0.243%
TL/TA = TOTAL LIABILITIES/TOTAL ASSETS 0.642 0.659 0.662 0.646 0.655 0.689 0.656 0.581 0.594
CLCA = CURRENT LIABILITIES / CURRENT ASSETS 1.104 0.856 0.869 0.585 0.615 0.601 0.623 0.756 0.666
NITA = NET INCOME / TOTAL ASSETS 0.045 0.063 0.063 0.067 0.056 0.050 0.064 0.075 0.069
THE VALUE OF "y" IS: -5.037 -5.289 -5.264 -5.604 -5.468 -5.118 -5.470 -5.911 -5.737
OHLSON'S PROBABILITY OF BANKRUPTCY IS: 0.645% 0.502% 0.515% 0.367% 0.420% 0.595% 0.419% 0.270% 0.322%
Since the stock has an option value, a major acquisition of risky assets by
a firm in financial distress increases the value of stock, but decreases the
value of debt.
Such covenants may also restrict asset sales because such sales can
serve to reduce the security (i.e., collateral) lenders have in event of
bankruptcy.
Prof. Charles E. Wasley 29
Review Question #1
U.S. firms:
With low leverage have an interest-bearing net debt-to-equity ratios of 0% or
less.
With medium leverage have a ratio between 1% and 62%.
With high leverage have a ratio of 63% or more.
So how and why would you classify the following companies firms in terms
of their optimal debt-to-equity ratio (high, medium, or low)?
A successful pharmaceutical company.
An electric utility.
A manufacturer of consumer durables.
A commercial bank.
A start-up software company.
Think about this question carefully before flipping to the suggested answer
on the following slides. Prof. Charles E. Wasley 30
Review Question #1: Suggested
Response
An electric utility:
High debt-to-equity ratio.
Debt is a favorable form of financing for an electric utility because an
electric utility has low business risks.
An electric firms revenues and earnings are not sensitive to the
fluctuations in the economy.
In addition, an electric utility typically has large tangible assets to provide
security for lenders.
Prof. Charles E. Wasley 31
Review Question #1: Suggested
Response
PROP, PLANT & EQUIP (GROSS) $178,678 $171,724 $160,938 $154,489 $143,517 $131,161 $127,992 $115,190 $100,929 $88,593
ACCUMULATED DEP -$60,771 -$55,043 -$48,614 -$46,611 -$41,210 -$35,508 -$31,125 -$26,750 -$23,064 -$20,475
PROP, PLANT & EQUIP (NET) $117,907.0 $116,681.0 $112,324.0 $107,878.0 $102,307.0 $95,653.0 $96,867.0 $88,440.0 $77,865.0 $68,118.0
GOODWILL $19,510 $20,497 $20,651 $16,763 $16,126 $15,260 $15,879 $13,759 $12,097 $10,803
Other assets and deferred charges $6,149 $5,987 $5,456 $4,129 $3,942 $3,567 $2,748 $2,406 $4,400 $2,379
TOTAL LONG-TERM ASSETS $143,566.0 $143,165.0 $138,431.0 $128,770.0 $122,375.0 $114,480.0 $115,494.0 $104,605.0 $94,362.0 $81,300.0
TOTAL ASSETS $204,751.0 $203,105.0 $193,406.0 $180,782.0 $170,407.0 $163,429.0 $163,514.0 $151,587.0 $138,187.0 $120,154.0
FISCAL YEAR ENDED (MOST RECENT YEAR FIRST) 31-Jan-2014 31-Jan-2013 31-Jan-2012 31-Jan-2011 31-Jan-2010 31-Jan-2009 31-Jan-2008 31-Jan-2007 31-Jan-2006 31-Jan-2005
ACCOUNTS PAYABLE $37,415 $38,080 $36,608 $33,676 $30,451 $28,849 $30,344 $28,484 $25,101 $21,987
ACCRUED EXPENSES $18,793 $18,808 $18,180 $18,701 $18,734 $18,112 $15,725 $14,675 $13,274 $12,120
ACCRUED TAXES PAYABLE $966 $2,211 $1,164 $157 $1,347 $677 $1,000 $706 $1,340 $1,281
Current liabilities of discontinued oper $89 $0.0 $0.0 $47 $92 $83 $140 $0.0 $477 $0.0
SHORT-TERM DEBT $7,670 $6,805 $4,047 $1,031 $523 $1,506 $5,040 $2,570 $3,754 $3,812
CURRENT PORTION OF LTD $4,103 $5,587 $1,975 $4,655 $4,050 $5,848 $5,913 $5,428 $4,595 $3,759
CURRENT PORTION OF CAPITAL LEASES $309 $327 $326 $336 $346 $315 $316 $285 $284 $223
TOTAL CURRENT LIAB $69,345.0 $71,818.0 $62,300.0 $58,603.0 $55,543.0 $55,390.0 $58,478.0 $52,148.0 $48,825.0 $43,182.0
LONG TERM DEBT $41,771 $38,394 $44,070 $40,692 $33,231 $31,349 $29,799 $27,222 $26,429 $20,087
CAPITAL LEASE OBLIGATIONS $2,788 $3,023 $3,009 $3,150 $3,170 $3,200 $3,603 $3,513 $3,667 $3,171
Deferred income taxes and other $8,017 $7,613 $7,862 $6,682 $5,508 $6,014 $5,087 $4,971 $4,630 $2,978
Redeemable noncontrolling interest $1,491 $519 $404 $408 $307 $397 $0.0 $0.0 $0.0 $0.0
Nonredeemable noncontrolling interest $5,084 $5,395 $4,446 $2,705 $2,180 $1,794 $1,939 $2,160 $1,465 $1,340
TOTAL INTEREST BEARING LTL $44,559.0 $41,417.0 $47,079.0 $43,842.0 $36,401.0 $34,549.0 $33,402.0 $30,735.0 $30,096.0 $23,258.0
TOTAL NON-INTEREST BEARING LTL $14,592.0 $13,527.0 $12,712.0 $9,795.0 $7,995.0 $8,205.0 $7,026.0 $7,131.0 $6,095.0 $4,318.0
TOTAL LONG-TERM LIABILITIES $59,151.0 $54,944.0 $59,791.0 $53,637.0 $44,396.0 $42,754.0 $40,428.0 $37,866.0 $36,191.0 $27,576.0
TOTAL LIABILITIES $128,496.0 $126,762.0 $122,091.0 $112,240.0 $99,939.0 $98,144.0 $98,906.0 $90,014.0 $85,016.0 $70,758.0
COMMON STOCK $323 $332 $342 $352 $378 $393 $397 $413 $417 $423
PAID IN CAPITAL $2,362 $3,620 $3,692 $3,577 $3,803 $3,920 $3,028 $2,834 $2,596 $2,425
RETAINED EARNINGS $76,566 $72,978 $68,691 $63,967 $66,357 $63,660 $57,319 $55,818 $49,105 $43,854
ACCUMULATED COMPREHENSIVE INCOME (LOSS) -$2,996 -$587 -$1,410 $646 -$70 -$2,688 $3,864 $2,508 $1,053 $2,694
TOTAL SHAREHOLDER EQUITY $76,255.0 $76,343.0 $71,315.0 $68,542.0 $70,468.0 $65,285.0 $64,608.0 $61,573.0 $53,171.0 $49,396.0
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $204,751.0 $203,105.0 $193,406.0 $180,782.0 $170,407.0 $163,429.0 $163,514.0 $151,587.0 $138,187.0 $120,154.0
PROP, PLANT & EQUIP (GROSS) $45,780 $43,964 $41,531 $37,048 $35,765 $34,816 $31,982 $28,381 $25,214 $22,272
ACCUMULATED DEP $14,402 $13,311 $12,382 $11,555 $10,485 $9,060 $7,887 $6,950 $6,176 $5,412
PROP, PLANT & EQUIP (NET) $31,378.0 $30,653.0 $29,149.0 $25,493.0 $25,280.0 $25,756.0 $24,095.0 $21,431.0 $19,038.0 $16,860.0
Company-owned life insurance investments $305 $269 $371 $358 $319 $305 $578 $559 $524 $446
GOODWILL $151 $59 $59 $59 $59 $60 $60 $60.0 $60.0 $206.0
INTANGIBLE ASSETS $206 $165 $183 $164 $180 $171 $148 $152 $123 $0.0
Interest Rate Swaps $62 $85 $114 $139 $131 $163 $215 $23 $0 $0
Prepaid Pension Expense $0 $0 $0 $0 $0 $1 $394 $325 $752 $733
OTHER LONG-TERM ASSETS $409 $338 $249 $279 $140 $162 $164 $93 $93 $126
TOTAL LONG-TERM ASSETS $32,511.0 $31,569.0 $30,125.0 $26,492.0 $26,109.0 $26,618.0 $25,654.0 $22,643.0 $20,590.0 $18,371.0
TOTAL ASSETS $44,084.0 $47,957.0 $46,574.0 $43,705.0 $44,533.0 $44,106.0 $44,560.0 $37,349.0 $34,995.0 $32,293.0
FISCAL YEAR ENDED (MOST RECENT YEAR FIRST) 01-Feb-2014 02-Feb-2013 28-Jan-2012 29-Jan-2011 30-Jan-2010 31-Jan-2009 02-Feb-2008 03-Feb-2007 28-Jan-2006 29-Jan-2005
ACCOUNTS PAYABLE $7,683 $6,468 $6,282 $6,067 $6,511 $6,337 $6,721 $6,575 $6,268 $5,779
ACCRUED EXPENSES $2,835 $3,471 $3,184 $3,039 $2,477 $2,282 $2,337 $2,195 $2,193 $1,633
ACCRUED TAXES PAYABLE $221 $272 $257 $144 $24 $0 $111 $422 $374 $304
Gift Card Liability $521 $503 $467 $422 $387 $381 $372 $338 $0 $0
Interest Payable $85 $91 $109 $103 $105 $130 $162 $122 $0 $0
Dividends Payable $272 $232 $202 $176 $127 $120 $115 $103 $0 $0
CURRENT PORTION OF LTD $1,160 $2,994 $3,786 $119 $1,696 $1,262 $1,964 $1,362 $753 $504
TOTAL CURRENT LIAB $12,777.0 $14,031.0 $14,287.0 $10,070.0 $11,327.0 $10,512.0 $11,782.0 $11,117.0 $9,588.0 $8,220.0
LONG TERM DEBT $12,622 $14,654 $13,697 $15,607 $15,118 $17,490 $15,126 $8,675 $9,119 $9,034
DEFERRED TAXES $1,433 $1,311 $1,191 $934 $835 $455 $470 $577 $851 $973
Other noncurrent liabilities $1,375 $1,439 $1,409 $1,479 $1,728 $1,619 $1,733 $1,347 $1,232 $1,037
Pension and postretirement health care $115 $170 $225 $128 $178 $318 $142 $0 $0 $0
TOTAL INTEREST BEARING LTL $12,622.0 $14,654.0 $13,697.0 $15,607.0 $15,118.0 $17,490.0 $15,126.0 $8,675.0 $9,119.0 $9,034.0
TOTAL NON-INTEREST BEARING LTL $2,923.0 $2,920.0 $2,825.0 $2,541.0 $2,741.0 $2,392.0 $2,345.0 $1,924.0 $2,083.0 $2,010.0
TOTAL LONG-TERM LIABILITIES $15,545.0 $17,574.0 $16,522.0 $18,148.0 $17,859.0 $19,882.0 $17,471.0 $10,599.0 $11,202.0 $11,044.0
TOTAL LIABILITIES $28,322.0 $31,605.0 $30,809.0 $28,218.0 $29,186.0 $30,394.0 $29,253.0 $21,716.0 $20,790.0 $19,264.0
COMMON STOCK $53 $54 $56 $59 $62 $63 $68 $72 $73 $74
PAID IN CAPITAL $4,470 $3,925 $3,487 $3,311 $2,919 $2,762 $2,656 $2,387 $2,121 $1,810
RETAINED EARNINGS $12,599 $13,155 $12,959 $12,698 $12,947 $11,443 $12,761 $13,417 $12,013 $11,148
ACCUMULATED COMPREHENSIVE INCOME (LOSS) -$1,360.0 -$782.0 -$737.0 -$581.0 -$581.0 -$556.0 -$178.0 -$243.0 -$2.0 -$3.0
TOTAL SHAREHOLDER EQUITY $15,762.0 $16,352.0 $15,765.0 $15,487.0 $15,347.0 $13,712.0 $15,307.0 $15,633.0 $14,205.0 $13,029.0
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $44,084.0 $47,957.0 $46,574.0 $43,705.0 $44,533.0 $44,106.0 $44,560.0 $37,349.0 $34,995.0 $32,293.0