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Analysis Of Summer Peebles, Inc.

476 Words2 Pages

Option 1 Ratio Analysis Exercises and Problems Coverage ratios are important measurements used to determine an organizations solvency. Solvency refers to the ability of a firm to cover long-term financial obligations. In order to determine the solvency and financial strength of a company, the earnings coverage, which is a firm’s ability to continuously generate cash from operations, is analyzed. Through having a stable earnings stream, organizations have a greater ability to borrow funds during times of financial hardship. Furthermore, long-term earnings coverage identifies sources of interest and principal payments to indicate long-term liquidity, solvency and the borrowing ability of a company (Subramanyam, 2014). Overall, three useful …show more content…

earnings coverage revealed the organization has enough earnings to meet their long-term fixed charges. The company’s earnings to fixed charges ratio is 8.714, indicating the company has more than eight times enough earnings to meet their debt related fixed charges. Moreover, Summer Peebles, Inc. cash flow to fixed charges was an astounding 11.107. Since the cash flow to fixed charges uses pre-tax cash from operations rather than pre-taxed income, it provides a stricter analysis of the firm’s solvency. Furthermore, this calculation eliminates revenues and expenses that do not immediately generate cash. Consequently, Summer Peebles immediate cash flow supersedes their earnings to fixed charges because it highlights the company’s ability to meet their fixed charges eleven times over. In addition, the company’s earnings coverage of preferred dividends is lower but still sufficient at 3.978. This ratio measures the Summer Peebles ability to cover preferred dividends and includes costs that take priority over preferred dividends (Subramanyam, 2014). Accordingly, with a ratio of 3.978 the firm has a healthy ability to pay their required dividend payments in the long-term. Therefore, Summer Peebles coverage ratios indicate the organizations long terms earnings will successfully cover the companies fixed

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