4-31 Assess Credit Risk (LO2, 3) Balance sheets and income statements for NextEr
ID: 2771443 • Letter: 4
Question
4-31
Assess Credit Risk (LO2, 3)
Balance sheets and income statements for NextEra Energy, Inc. follow. Refer to these financial state-ments to answer the requirements
Required
a. Use the financial statements and the information below to compute the following profitability and coverage, liquidity and solvency ratios for 2012 and 2011: RNOA, ROE, times interest earned, free cash flow to debt, current ratio, quick ratio, liabilities-to-equity ratio, and total debt-to-equity ratio. (For simplicity here, use year-end balances for the denominator of RNOA and ROE.) Comment on any observed trends
b. 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?
*** Show ALL Work Please To Be Voted Best Answer ***
Explanation / Answer
Operating Return (RNOA) = Net Operating Profit After Taxes (NOPAT) / Average Net Operating Assets (NOA)
Net Operating Assets = Operating Assets - Operating Liabilities
2011 2012 NOPAT 1291 1470 Net operating asset 35277 43093 RNOA 3.66% 3.41%Operating Return (RNOA) = Net Operating Profit After Taxes (NOPAT) / Average Net Operating Assets (NOA)
Net Operating Assets = Operating Assets - Operating Liabilities
ROE Return on Equity = Net Income/Shareholder's Equity 2011 2012 Net Income 1068 1240 Shareholders equity 14943 16068 ROE 7.147% 7.717% Times interest earned Times interest earned = EBIT/total interest payable on bonds and other contractual debt 2011 2012 EBIT 2076 2357 Total interest payable on bonds and other contractual debt 387 417 Times interest earned 5.364341 5.652278177 (This figure is in absolute number) Free cash flow to debt Current ratio Current asset/current liability 2011 2012 Current asset 4872 5237 Current liability 6719 8879 Current ratio 0.725108 0.589818673 (This figure is in absolute number) Quick ratio Quick ratio = (cash & cash equivalent + receivebiles +other receivibles) / current liabilities 2011 2012 cash & cash equivalent + receivebiles +other receivibles 2179 2385 current liabilities 6719 8879 Liability to equity ratio 0.324304 0.26861133 (This figure is in absolute number) Debt to equity ratio Debt - Equity Ratio = Total Liabilities / Shareholders' Equity 2011 2012 Total liabilities 42245 48371 Equity 14943 16068 Debt to equity ratio 2.827076 3.010393328 (This figure is in absolute number) B.The company has high debt and it has a very high credit risk Its current ratio is less than 1 that means it is finind difficulty in carrying its operations with the funds generated Though its time interest earned ratio is good. Overall the company is onhigh credit risk and not recommended for investmentment in its shares.Related Questions
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