Posted: March 12th, 2023

Week 4 Discussions

Respond to at least four of your fellow students’ or instructor posts in a substantive manner. Each response should have a minimum of 100 words and be respectful of others’ opinions and beliefs that differ from your own.

Total of 400 words 

(Discussion 1 Responses)

Allan’s Post
To assess the financial health of a company and its ability to pay its creditors analysts
often calculate Current Ratios and Quick Ratio. The current ratio is calculated by dividing
total current assets by total current liabilities. A current ratio of 2:1 is usually preferred,
and it means that the company has twice the amount of assets to cover its current
liabilities. (Porter & Norton, 2018) When a company is large amounts of inventory, that
inventory amount can be deducted from current assets. This allows the company to
calculate a quick ratio which shows how much liquid assets do the company have to pay
off its current liabilities. This ratio should ideally be close to 1.5:1.
Macy’s Current ratio and Quick ratio for 2022 and 2021 was as follows:

Current ratio tells us that Macy’s has almost 1.25 times the amount of Current assets as
compared to its current liabilities for year ended 2022 and 1.15 in 2021. As compared to
its competitors such as Walmart and Dillard’s, it shows that Dillard’s has a better current
ratio at 1.98:1 in 2022 but Walmart is a lot worse at 0.93:1.
Quick Ratio tells us that Macy’s has almost 0.37 times the amount of liquid assets as
compared to its current liabilities for year ended 2022 and 0.36 in 2021. As compared to
its competitors such as Walmart and Dillard’s, it shows that Dillard’s has a better current

ratio at 0.78 in 2022 but Walmart is a lot worse that Macy’s at 0.36. The firm has the
ability to pay off its creditors but a huge amount of funds are tied with large amounts of
inventory and some prepaid expenses.
According to the Macy’s annual report, the liability for merchandise returns increased
from $159 Million $198 Million in 2022. This impacted Current liabilities to increase
drastically in 2022. Although prepaid expenses increased by $17M in 2022, the increase
in current liabilities outpaced the increase in current assets.
Balance sheet details reveal that the company is liable for a potential lease that ends in
2070 aggregating to $197 Million, but the risk of loss is very minimal as Macy’s transfers
this cost on to its tenants in the form of rent.
I agree with how the contingency is being reported as disclosed but not recorded as it
should be as the lease expense needs to be recorded when incurred versus accruing
contingent losses that may or may not incur in the future.

Tracy’s Post
Peloton

Two metrics that are often used by potential creditors to determine if a company is able
to meet its short-term obligations are the Quick and Current Ratio (Porter & Norton,
2018). To calculate the current ratio, divide the total of the company’s current assets by
the total of its current liabilities. The most common way to calculate a company’s quick
ratio is to add the most liquid assets and divide the total by current liabilities.

According to Peloton’s Annual Reports for 2021and 2022, their current ratio was 2.3 for
2021 and 2.4 for 2022. Peloton’s quick ratio for 2021 was 1.38 and 1.40 for 2022.
Compared to the industries average, Nautilus’ current ratio for 2021 was 2.5 and
Innovative Design’s was 2.2 (Mergent online, 2023). Peloton is somewhat in the middle
of its competition. Low or decreasing quick ratios generally suggest that a company is
over-leveraged, struggling to maintain or grow sales, paying bills too quickly or collecting
receivables too slowly. On the other hand, a high or increasing quick ratio generally
indicates that a company is experiencing solid top-line growth, quickly converting
receivables into cash, and easily able to cover its financial obligations. Peloton’s highest
current ratio was in 2019 and has decreased since then. In September of 2021, it
dropped down to 1.96. This was partially due to the recall of their treadmill and people
returning to work due to the pandemic.

According to Peloton’s 2022 Annual Report, they did not report any contingent
liabilities. When a liability possibly occurred, it is recorded, and the assessment will be
reasonably estimated. If a loss is reasonably possible and the loss or range of loss can be

reasonably estimated, the Company discloses the possible loss or states that such an
estimate cannot be made. In 2021, Peloton had a major recall for one its treadmills. The
recall is ongoing through 2023. I believe Peloton handled the recall the best way they
possibly could. This does not change my assessment of the company.

(Discussion 2 Responses)

Jonathan’s Post
Hello classmates!

My analysis will continue for Gamestop (NYSE: GME).

Ratio Calculations

The relevant data from the annual reports is as follows, as well as the output calculations
using the following formulas:

• Debt-to-Equity Ratio = Total Liabilities / Total Stockholder’s Equity
• Times Interest Earned Ratio = Income Before Interest and Tax / Interest

Expense

Ratio Analysis & Industry Comparison

Compared to the industry average of 1.04, Gamestop has rejoined the pack in terms of
debt-to-equity ratio in their most recent annual report. When looking at the industry
average for times interest earned ratio, the industry average is ~20 for the past few
years, and Gamestop has also rejoined the industry after its latest market offering,
generating a significant amount of stockholder equity to support a relatively consistent
liability total (Gamestop, 2021) (Gamestop, 2022) (Mergent, 2022). Gamestop has also
reduced its long-term debt and liabilities significantly over the past two annual reports to
support the shift in these ratios. The ratios show that Gamestop has made a significant
effort to pay down its debts as well, showing that they are using the cash they have
raised to put them in a better financial position (Porter & Norton, 2018).

It is worth noting that although their ratio is near the industry average, they are still
operating at a net loss.

Lender Recommendation

As a lender, I would be willing to lend money to Gamestop based on its use of debt, but
not willing due to its current operating status. I would need to see a detailed plan for
turning a profit within a short amount of time (2 years) to consider lending to Gamestop,
and more than likely at a higher interest rate until their financials improve.

Holly’s Post
John Deere Analysis

Debt/Equity Ratio: Where Current and Quick Ratios reflect a company’s ability to pay
for debts in real-time, the debt/equity ratio is meant to show how effectively a company
is using debt to finance its business by comparing its total debt to its shareholder
equity. In general, a higher debt/equity ratio reflects a company may be using too much
debt whereas a very low ratio might reflect the company is being too conservative and
may be missing out on investment opportunities. This is another ratio that provides the
best insights when compared with other companies in the same industry (Fernando,
2022).

• 2021: 3.56
• Industry Average: 2.7
• 2022: 3.44
• Industry Average: 3.29

Times Interest Earned Ratio: Times Interest Earned Ratio (TIE), also known as the
Interest Coverage Ratio, is another measure that reflects a company’s ability to pay its
debt. However, rather than reflecting how the company’s assets can pay off its debt, this
ratio reflects how many times its debt expense can be paid for with the money it will
earn in the upcoming period. TIE is calculated by dividing a company’s earnings before
interest and taxes (EBIT) by its total interest payable. (Chen, 2022).

• 2021: 9.09
• Industry Average:
• 2022: 9.54
• Industry Average:

*Note: the industry average that was calculated by mergent for the selected companies was
skewed by some very high ratios; however, looking across its competitors, John Deere’s TIE
was very close but slightly less than many of its peers.

My Analysis: Looking at John Deere’s debt/equity and TIE ratios from its consolidated
figures, the company is in-line or ahead of its peers with the way its financing its
business and with its ability to cover its interest expenses with revenue. From a
debt/equity perspective, I would feel comfortable investing in this company.