Kimberly-Clark presented the following financial information, all amounts in tho
ID: 2476406 • Letter: K
Question
Kimberly-Clark presented the following financial information, all amounts in thousands:
December 31
Year 2
Year 1
Cash
$ 19,500
$ 22,400
Accounts receivable
28,700
24,900
Inventory
38,900
42,000
Equipment
174,600
168,500
Accumulated depreciation
45,600
42,500
Total assets
$216,100
$215,300
Accounts payable
$ 27,300
$ 37,900
Dividends payable
12,300
15,900
Salaries payable
4,600
2,600
Income taxes payable
14,000
13,600
Long-term notes payable
37,000
42,000
Common stock
64,100
49,700
Retained earnings
56,800
53,600
Total liabilities & equity
$216,100
$215,300
1.
Kimberly Clark’s operating income for Year 2 totaled $71,400,000. Net income totaled $59,000,000 and interest expense was $5,600,000. Evaluate the financial risk of Kimberly Clark using the financial information provided. Indicate whether you believe that a bank would find this company to be a lending risk.
December 31
Year 2
Year 1
Cash
$ 19,500
$ 22,400
Accounts receivable
28,700
24,900
Inventory
38,900
42,000
Equipment
174,600
168,500
Accumulated depreciation
45,600
42,500
Total assets
$216,100
$215,300
Accounts payable
$ 27,300
$ 37,900
Dividends payable
12,300
15,900
Salaries payable
4,600
2,600
Income taxes payable
14,000
13,600
Long-term notes payable
37,000
42,000
Common stock
64,100
49,700
Retained earnings
56,800
53,600
Total liabilities & equity
$216,100
$215,300
Explanation / Answer
Some of the financial ratios that are most commonly used by investors and analysts to assess a company's Financial Risk level and overall financial health are the debt-to-capital ratio, the debt/equity ratio, the interest coverage ratio and the degree of combined leverage.
1. Debt to Total Capital
This measures the proportion of debt used given the total capital structure of the company. A large debt-to-capital ratio indicates that equity holders are making extensive use of debt, making the overall business riskier.
Debt to capital = total debt
total capital
Where:
Total debt = current + long-term debt
Total capital = total debt + stockholders' equity
2. Debt to Equity
This ratio is similar to debt to capital.
Debt to equity = total debt
total equity
3. Times Interest Earned (Interest Coverage ratio)
This ratio indicates the degree of protection available to creditors by measuring the extent to which earnings available for interest covers required interest payments.
Times interest earned = earnings before interest and tax
interest expense
4. Degree of Combined Leverage
The Degree of combined leverage provides a fuller, more complete assessment of a company's total risk by factoring in both operating leverage and financial leverage. This leverage ratio estimates the combined effect of both business risk and financial risk on the company's earnings per share (EPS), given a particular increase or decrease in sales. Calculating this ratio can help management identify the best possible levels and combination of financial and operational leverage for the firm.
By using all that above Formula you can easily find Company Financial Risk
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