Home depot liquidity ratios i h quick ratio i cj

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Home Depot Liquidity Ratios / I H~ Quick ratio I / CJ Current ratio I ~-~ ~ ". ~~. I-- / / / .I - I-- / - r-- / - - r-- V - - - r-- / '7 '7 '7 '----. 0.28 1.40 0.24 1.35 0.20 1.30 0.16 1.25 0.12 0.08 1.20 1.15 0.04 1.10 0.00 1.05 2008 2009 2010 2011 - Ratio The quick ratio is a variant of the current ratio. It focuses on quick assets, which are assets likely to be converted to cash within a relatively short period of time. Specifically, assets include cash, marketable securities, and accounts receivable; they exclude invento- and prepaid assets. The quick ratio is defined as follows: Cash + Marketable securities + Accounts receivables Quick ratio = --------------------- Current liabilities quick ratio gauges a company's ability to meet its current liabilities without liquidating inven- that could require markdowns. It is a more stringent test of liquidity than the current ratio. e Depot's 2011 quick ratio is 0.16, computed as ($545 million + $1,085 million)/$10,122 mil- It is not uncommon for a company's quick ratio to be less than 1.0. Home Depot's 2011 quick i lower than in 2010 but higher than the previous two years, as the graphic shows. This is due igher accounts receivable but less cash in 2011 compared to 2010. In 2011, the current ratio ~",;., 1<: about the same as the prior year but the quick ratio drops. This signals a potential buildup ventory, which is something financial statement users should monitor. ency Analysis Long-term solvency analysis considers a company's ability to meet its debt gations, including both periodic interest payments and the repayment of the principal amount wed. The general approach to measuring solvency is to assess the level of liabilities relative equity. There are a variety of ratios used to gauge solvency; all use balance sheet data and the proportion of capital raised from creditors. We discuss two solvency ratios: liabilities- -equity and long-term debt to total capital. - ilities-to-Equity The liabilities-to-equity ratio is defined as follows: Total liabilities Liabilities-to-equity ratio = --------- Stockholders' equity ~ r., ratio conveys how reliant a company is on creditor financing compared with equity financ- = higher ratio indicates a less solvent company. The median ratio of totalliabilities-to-equity slightly less than 1.0 for publicly traded companies. This means that the average company is Note: Debt is normally a less costly source of financing vis-a-vis equity financing. Although less costly, debt carries default risk: the risk that a company is unable to repay debt principal and interest when it comes due.
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4-17 Module 4 I Credit Risk Analysis and Interpretation 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Y L-"'-'/ w=J/ '---' / ~ / '---I/ L..:...-.T / L...-T / ~/ 0.0 ~ i i ~ ~ ~ ~ i ·0<::- ~ o~ ~""~ ~<b' 0"" 00 ~~ (;'b-.Q.~ ·0<::-"" ~ ~v {:'v o~ CJ ~V-0 ~"" ~v 0 v 'b- CJ ~~ «.~ financed with about half debt and half equity. However, the relative use of debt varies consider- ably across industries as illustrated in Exhibit 4.4. j ·EXHIBI~~~~ Median Ratio of Liabilities-to-Equity for Selected Industries Median Ratio of Liabilities-to-Equity Companies in the food, transportation, capital goods, and utilities industries have among the highest proportions of debt. Because the utilities industry is regulated, profits and cash flows are relatively certain and stable and, as a result, utility companies can support a higher debt level. The
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