# (A) Solvency . To Determine Microline’S Solvency, The Ability

1708 WordsMar 12, 20177 Pages
(a) Solvency To determine Microline’s solvency, the ability to meet its long-term debt, I will calculate several different ratios that will give me a better picture of the company’s health. The first ratio I will calculate is the Interest Coverage Ratio which is the Operating income / Interest expense. This will calculate Microline’s ability to cover its interest payments with its operating income. Microline’s income statement doesn’t give a EBIT figure, so I will first calculate that by adding the interest expense back to the net income before taxes to get operating income. The amount is \$5,750 and I will now divide that number by the \$1,000 interest expense to get 5.75. This number means that Microline can cover its interest payments…show more content…
Microline is solvent, but as indicated, they have begun to take on more debt in 2014 than they did in 2013. (b) Earnings power; To determine Microline’s earning’s power, the ability for the company to generate a profit, I will use two widely accepted ratios to determine this. The first ratio is Return on Assets, ROA, and is the calculated by dividing the net income by the total assets or net income/total assets. The ratio for ROA in 2013 is .021. I arrived at this number by dividing 2013 net income of \$900 by the 2013 total assets of \$42,500. I did the same for 2014 by dividing the Net Income of \$3,250 by the Total Assets of \$51,250. 2014 ROA was .063. Their 2014 earning power was higher than their 2013 earning power. In 2014, for every dollar that the company had in assets, the generated a 6.3 cents return of profit. Conversely in 2013, Microline generated only 2.1 cents return on profit. Microline had 3 times the earning power from 2013 to 2014. I will now calculate a second ratio so that I can have another dimension to determine Microline’s earning power. I will use the ratio of Return on Equity, ROE, which is like ROA in that it uses a company’s net income, but instead of dividing it by a company’s assets, net income divided by shareholder’s equity. I will take the net income figures from each year and divided it by the sum of the retained earnings and common stock from each