Refer to the financial statements and related disclosure notes of PetSmart in Ap

ID: 2566829 • Letter: R

Question

Refer to the financial statements and related disclosure notes of PetSmart in Appendix B located at the back of this textbook. Long-term solvency refers to a company’s ability to pay its long-term obligations. Financing ratios provide investors and creditors with an indication of this element of risk.

We compute the debt to equity ratio by dividing a company’s total liabilities by total shareholders' equity. The ratio summarizes the capital structure of the company as a mix between the resources provided by creditors and those provided by owners. For instance, a ratio of 2.0 means that twice as many resources (assets) have been provided by lenders as those provided by owners.

Required:

a. Calculate the debt to equity ratio for PetSmart at February 2, 2014. The ratio is provided. You must enter the correct amounts to earn the points.

Debt to equity ratio                   =                      Total liabilities
                                                                   Shareholders' equity

                                               =                                 $
                                                                                  $

                                               =                              1.31

                                                                       Industry = 1.8

The average ratio for companies in the pet supplies industry in a comparable time period was 1.8. 1. b. What information does your calculation provide an investor?

Answer:

Go to page 2 for requirement 2

Lenders demand interest payments as compensation for the use of their capital. Inability to pay interest as scheduled may cause several adverse consequences, including bankruptcy. Thus, another way to measure a company's ability to pay its obligations is by comparing interest payments with cash flow available to pay those obligations. The times interest earned ratio does this by dividing income before subtracting interest expense or income tax expense by interest expense.

2. a. Calculate PetSmart’s times interest earned ratio for the year ended February 2, 2014. The ratio is provided. You must enter the correct amounts to earn the points.

Times interest earned = Net income + interest + taxes

Interest

            =                      $       +            +
                                    $

            =                      13.7 times

                                    Industry = 12 times

The coverage for companies in the pet supplies industry in a comparable time period was 12.

b. What does your calculation indicate about PetSmart’s risk?

Answer:

Resources From Appendix B Listed Below

PetSmart, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except par value) February 2, 2014 February 3,2013 ASSETS Cash and cash oquivalents Short-tenm investments Restricted cash Receivables, net Merchandise inventories Deferred income taxes Prepaid expenses and other current assets 285,622 71,226 72,685 740,302 71,945 76,463 1.318,243 952,955 33,577 1 10,408 41,140 65,645 2.521,968 335,155 9,150 71,916 72,198 679,090 62,859 86,768 1,317,136 985,707 39,934 102,992 44,242 46,970 2,536,981 Total current assets Property and equipment, net Equity investment in Banfield Deferred income taxes Goodwill Other noncurrent assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY 255,251 160,008 81,867 66,887 230,332 794,345 451,597 65,932 116,312 1.428,186 202,122 176,082 70,671 61,581 244436 754,892 464,578 73,855 120,064 1,413,389 Accounts payable and bank overdraft Accrued payroll, bonus, and employee benefits Accrue Current maturities of capital lease obligations Other current liabilities d occupancy expenses and deferred rents Total current liabilities Capital lease obligations Deferred rents Other noncurrent liabilities Total liabilities Commitments and contingencies Stockholders' equity: Preferred stock; $.0001 par value: 10,000 shares authorized, none issued and outstanding Common stock: $.0001 par value: 625,000 shares authorized, 169,178 and 167.209 shares issued Additional paid-in capital Retained earnings Accumulated other comprehensive (loss) income Less: Treasury stock, at cost, 68,520 and 61,879 shares 17 1,515,333 2.173,005 17 1,418,411 1,827,996 5,506 2,159) (2,128,338) 1,123,592 2,536,981 (2,592,414) Total stockholders equity Total liabilities and stockholders equity 1,093,782 2.521,968 The accompanying notes are an integral part of these consolidated financial statements.

Explanation / Answer

1. a.
Debt to equity ratio (at February 2, 2014) = Total liabilities / Shareholders' equity
= $ 1428186/ $ 1093782
= 1.31 (Approx)

1.b.
Debt equity ratio measures financial leverage of the company.
Here, PetSmart's ratio is 1.31 and industry ratio is 1.8.
Which means PetSmart took relatively low debt to finance its assets.
It has relatively low risk and more Financial stability to the business.

2.a
Times interest earned (at February 2, 2014)) = (Net income + interest + taxes) / Interest
= $419520 + $51779 + $239444) / $51779
= 13.7 (Approx)

2.b
Times interest earned aka Interest coverage ratio measures company's ability to pay its interest expenses with its available earnings.
Here, PetSmart's ratio is 13.7 times and industry ratio is 12 times.
Which means, PetSmart has relatively better ability to pay its interest expenses with its earnings.
It indicates a better financial position with lower credit risk.

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