EMRE TOSUN

0160076
5.12 CALCULATING AND INTERPRETING RISK RATIOS. Refer to the financial
statement data for Hasbro in Problem 4.23 in Chapter 4. Exhibit 5.15 presents risk
ratios for Hasbro for Year 2 and Year 3.
Required
a. Calculate the amounts of these ratios for Year 4.

Risk Ratios for Hasbro (Problem 5.12)

Revenues of Cash Ratio

Days Revenues Held in Cash
Current Ratio
Quick Ratio
Operating Cash Flow to Average Current Liabilities Ratio
Days Accounts Receivable
Days Inventory
Days Accounts Payable
Net Days Working Capital
Liabilities to Assets Ratio
Liabilities to Shareholders' Equity Ratio
Long-Term Debt to Long-Term Capital Ratio
Long-Term Debt to Shareholders' Equity Ratio
Operating Cash Flow to Total Liabilities Ratio
Interest Coverage Ratio

Year
4
4.8
76
1.5
1.1
0.344
72
53
47
78
0.494
0.976
0.156
0.185
0.213
9.1

Year
3
6.2
59
1.6
1.2
0.479
68
51
47
72
0.556
1.251
0.328
0.489
0.245
5.6

Year
2
7.7
47
1.5
1.1
0.548
73
68
49
91
0.621
1.639
0.418
0.72
0.238
2.3

b. Assess the changes in the short-term liquidity risk of Hasbro between Year 2 and Year 4
and the level of that risk at the end of Year 4.
The changes in the short-term liquidity risk ratios present mixed signals. Hasbro has built up its
balance in cash so that it has more days of revenue held in cash. This trend provides Hasbro with
liquidity and reduces its short-term liquidity risk. The current and quick ratios were steady during
the three years and at healthy levels. Again, these results suggest low short-term liquidity risk.
The operating cash flow to current liabilities ratio declined, and by Year 4, it was less than the 40
percent found for healthy companies. The decrease in this ratio is the result of declining cash
flow from operations and increasing current liabilities. Net income increased each year so that
the declining cash flow from operations is the result of changes in non-cash revenues and
expenses and in operating working capital accounts. Exhibit 4.30 indicates that the add-back for
depreciation and amortization decreased during the three years. Depreciation and amortization do
not affect cash flows; the smaller add-back simply offsets the smaller expense. Thus, changes in
depreciation and amortization do not explain the declining cash flow from operations. It appears

that the explanation lies primarily in a decrease in prepayments in Year 2 and a decrease in
accounts payable and other current liabilities in Year 4. The analyst would be concerned with the
decrease in current liabilities in Year 4 only if it signaled pressure from suppliers of various goods
and services to pay their amounts due. Even then, Hasbro has more than sufficient cash and
accounts receivable to cover all current liabilities. The net days of working capital declined
sharply between Year 2 and Year 3 as a result of reducing the days accounts receivable and
inventory being held, a positive sign in terms of reducing short-term liquidity risk. This occurred
in a year when sales increased. The net days of working capital increased again in Year 4, a year
in which sales decreased. It would not appear that Hasbro is unduly risky in terms of short-term
liquidity risk at the end of Year 4. Its current and quick ratios are at healthy levels and its days
inventory and accounts payable have been steady for the past two years. The only troublesome
aspect is the declining operating cash flow to current liabilities ratio. This ratio is not at a level of
extreme concern in Year 4, but a continuation of this trend could become troublesome.
c. Assess the changes in the long-term solvency risk of Hasbro between Year 2 and Year 4
and the level of that risk at the end of Year 4.
Hasbros long-term solvency risk has decreased significantly during the three-year period. Debt
levels have declined as Hasbro has redeemed debt. (See Hasbros statement of cash flow in
Exhibit 4.30.) Its interest coverage ratio has increased from a worrisome level in Year 2 to a very
healthy level in Year 4. The latter occurred because of a reduction in borrowing and an increase
in net income. Its operating cash flow to total liabilities ratio has been steady and above the 20
percent threshold for a healthy company. The reduced debt offset the declining cash flow from
operations to provide a relatively stable cash flow ratio. The level of long-term solvency risk at
the end of Year 4 appears low.