Current Ratio and Assets



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Question 1(Phyllis)

When determining the current ratio, the current assets are divided by the current liabilities to allow a comparison of the liquidity of the company which can be depicted by either a single company or different size companies and this shows over time.

Below you will find the figures for Fiserv for 2020 and 2019. (All figures are depicted in millions).

2020: 16,219,000/15,637,000 = 1.04

2019: 17,046,000/15,727,000 = 1.08

In regard to the current ratio of course it varies per industry. Normally a healthy ratio is considered between 1.5 and 3. At current the current ratio for Fiserv is 1.04 and 1.08 respectively for 2019 and 2020. This shows that the company does have some work to do when it comes to the industry standard. A lot of this can also be contributed to the fact that they have merged with two companies in less than 1.5 years. The transition and the meshing of the two companies has created some issue for liquidity.

The quick ratio measures a company’s ability to convert its liquid assets into cash so they can pay for short-term expenses and deal with upcoming emergencies. It provides a view for lenders to determine if the company is viable for investments and financing. When determining the quick ratio, this formula is used:

(Cash + Marketable Securities + Accounts Receivable) / Current Liabilities = Quick Ratio

2020: (906,000 + 0 + 2,482,000) / 15,637,000 = 0.22

2019: (893,000 + 0 + 2,782,000) / 15,727,000 = 0.23

The change of the current ratios from 2019 to 2020 can be attributed to the global pandemic and the mandatory shutdowns which included many out of work and not using their credit cards.  The change in the quick ratio was slight so there is stability there controlling and converting assets. Normally a healthy quick ratio should be greater than 1.0 and Fiserv falls below this. Again, this can be attributed to moving assets for the two mergers and taking on additional liabilities including holding accounts receivables longer than needed due to the pandemic. Companies were not able to pay on-time, and this caused Fiserv to have to hold the debt longer.

In regard to contingent liabilities, when looking at the balance sheet, I do not see anything that would be considered or labeled as a contingent liability. The only thing that I see that bring attention to the eye is other payable with no explanation. There is nothing for 2020 but there is 11,868,000 for 2019. I feel this should be more descriptive as to understand what the other payable items are that are included in these figures. I do not agree how this item was listed. I feel that just stating other payable with no description is like hiding something in plain sight. My assessment of the balance sheet and the ratios have not changed but if I were a stake holder in the company, I would question the entry and the request information.


Question 2(Balquis)

The company that I have been doing these reoccurring assignments on is General Motors. From 2019 to 2020 General Motors current ratio increased from .88 to 1.0. Current ratio looks at current assets in comparison to current liabilities to gage how liquid a company is to be able to pay short-term obligations. Per Porter & Norton (2018), “in general, the higher the current ratio, the more liquid the company.” This means that in 2020 General Motors became more liquid, putting it in a better position than it was in in 2019, short term health wise. Looking at General Motors current ratio in 2020, it is close to the auto industry current ratio average of 1.33 (Auto CR, 20201). As for General Motors quick ratio, it has increased from .76 in 2019 to .88 in 2020. This ratio is similar to current ratio but takes into consideration inventory as it can be converted to cash easily but is also utilized to gage a company’s short-term health and liquidity. GM has gotten more liquid since 2019 and is in better financial health than the industry average of .56.

General Motors 2020 2019
Current Assets 80924 74992
Current Liabilities 79910 84905
Current Ratio  1.01 0.88
Industry Average 1.33  
General Motors 2020 2019
Current Assets-Inventory 70689 64594
Current Liabilities 79910 84905
Quick Ratio  0.88 0.76
Industry Average 0.56  

The major causes of changes in these ratios, specifically reason behind the increased liquidity is the pandemic, and GM was intentional about increasing their liquidity. Per GM (2021), “Government-imposed restrictions on businesses, operations and travel and the related economic uncertainty have impacted demand for our vehicles in most of our global markets”. Due to this, GM took significant measures to increase their liquidity and eliminate expenses. Per GM (2021), areas they cut spending in are advertising, “other third-party spending, suspending our dividend on common shares, deferring salaried employee compensation and delaying non-critical projects, including certain future product program.” This was all in an effort to prepare for any major issues that might arise from the pandemic.

As for how GM chose to treat contingencies, I do agree with how they did it, by listing the contingencies and their details in the notes section and the amount. In addition, on the balance sheet under liabilities and Equity they added a note under liabilities stating “Commitments and contingencies (Note 16) “with no amounts included. Per Porter & Norton (2018), “contingent liability must be disclosed in the financial statement notes but not reported on the balance sheet if the contingent liability is at least reasonably possible.” In GM’s scenario, they have a litigation -related liability and tax administrative matter where losses are probable (GM. 2021). GM choosing to only list this in the notes section aligns with Porter and Norton’s statement. The contingent liabilities do no change my assessment of the company and I do like how for transparency GM made sure to add a note on the balance sheet to make sure whoever was reviewing the financials was aware of those contingencies and where to locate details about them.


Question 3(Robert)

Target Corp Long Term Debt to Equity is comparatively stable at the moment as compared to the past year. Target Corp reported Long Term Debt to Equity of 0.80 in 2020. Debt to Equity Ratio is likely to gain to 0.94 in 2021, whereas Average Equity is likely to drop slightly above 13.2 B in 2021. (“Target Corp debt to equity | (NYSE:TGT),” n.d.)

2021 2020
Times Interest Earned 6.68 9.78

* (“Target Corp. (NYSE:TGT),” n.d.)

The times interest earned (TIE) ratio is “a measure of a company’s ability to meet its debt obligations based on its current income” (“Understanding the times interest earned (TIE) ratio,” n.d.). This is important for every organization, as well as investors. Investors and other companies are unlikely to want to do business with a company that is unlikely to pay their debts in a timely manner. In the case of Target Corporation, they are more than able to pay their debts quickly.If I were a lender, I would be willing to lend money to Target Corporation based on its use of debt. Companies must make smart risks and avoid going into too much debt. There are situations where companies must invest in themselves and seek opportunities for growth. There are other situations where companies must cut back and avoid taking out too much debt. With the emergence of Coronavirus, companies like Target have needed to reduce their debts to be safe for the long run. There’s so much uncertainty in the market, large companies must mitigate the risk of taking on too much debt, and instead invest in innovation that will set them apart from their competitors.


Question 4(Kenneth)

The debt-to-equity ratio is defined as (total liabilities)/(total equity), and represent how well a company can pay for its commitments should there be a downturn in business.  A number under 1.0 would represent a company than could pay all of its commitments with the equity that it has and would indicate a solvent firm.  The times interest earned ratio also indicates a firms ability to bay its debts, specifically the interest and principle of loans.  It is calculated as (earnings before interest & taxes)/(interest expense).  This would be looked at as a firm tries to secure more debt for any reason (Porter, & Norton, 2018).

T-Mobile debt-to-equity ratio 2021 – 1.08 (Macrotrends, n.d.)

T-Mobile debt-to-equity ratio 2020 – 1.14 (Macrotrends, n.d.)

Industry average debt-to-equity ratio 2020 – 1.65 (My, 2020)

T-Mobile stands out here, AT&T is considered the most leveraged firm in the US and Verizon is in the top five, so they pull the industry average way up.  Most of their holdings generate quite a bit of cash flow, which makes the telecom business ripe to carry more debt than most firms.  From a comparison standpoint, T-Mobile’s last acquisition actually improved their debt-to-equity ratio, which makes it a wise investment in my opinion.  T-Mobile is playing a more conservative long game than its two largest competitors, but also has been in the “game” for much less time than the other big two.

T-Mobile times earned interest ratio 2021 – 2.49

T-Mobile times earned interest ratio 2020 – 2.9

Industry average times earned interest ratio 2021 – 5.28

T-Mobile and AT&T both have fairly low averages with Verizon having a quite high ratio above nine which drags the industry average up considerably.  T-Mobile seems to be fairly leveraged at the moment and behind AT&T even with their times earned interest ratio.  If I were a banker trying to determine if T-Mobile was in a position to take on more debt, I might have to think long and hard and also evaluate the firm that they were trying to acquire.  If it were a loan for operations, I would have deep concern.  Each of these firms is in a constant state of acquisition in merger which drives these ratios down meaningfully.



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