Short TermShort Term Solvency Solvency

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SHORT TERM SOLVENCY/ LIQUIDITY MEASURES Short- term solvency ratios are intended to provide information about firm’s liquidity. These ratios are sometimes called liquidity measures. The ratios focus on current assets and current liabilities.

1. Current Ratio Current ratio is the ratio of current assets of a business to its current liabilities. It is the most widely used test of liquidity of a business and measures the ability of a business to repay its debts. Current ratio is calculated using the following formula: Current Ratio = Current Assets Current Liabilities

For Chevron Corporation, the current ratio for 2010, 2011 and 2012 is: 2010: Current Ratio = $ 48,841 $ 28,825 = 1.69 2011: Current Ratio = $ 53,234 $ 33,260 = 1.60 2012: Current Ratio = $ 55,720 $ 34,085 = 1.63 From the calculation, the current ratios of Chevron Corp for three years exceed 1. Current ratio below 1 shows critical liquidity problems because it means that total current liabilities exceed total current assets. The higher the current ratio is better. Year 2010 has the highest current ratio.

2. Quick (or Acid Test ) Ratio The quick ratio is a financial ratio used to gauge a company's liquidity. The quick ratio is also known as the acid test ratio. It helps us to determine whether a business would be able to pay off all its debts by using its most liquid assets .The formula for quick ratio is: Current Assets − Inventory Current Liabilities

Quick Ratio =

For Chevron Corporation, the quick ratio for 2010, 2011 and 2012 is: 2010: Quick Ratio = $ 48,841 - 5493 $ 28,825 = 1.50 2011: Quick Ratio = $ 53,234 - 5543 $ 33,260 = 1.43 2012: Quick Ratio = $ 55,720 - 6144 $ 34,085 = 1.45 From the calculation, the current ratios of Chevron Corp for three years exceed 1 therefore Chevron Corp are able to repay their debt. A quick ratio of more than one indicates that the most liquid assets of a business exceed its total debts. A higher quick ratio is preferable because it means greater liquidity. Year 2010 has the highest ratio therefore it has greater liquidity compare to other year.

3. Cash Ratio Cash ratio is the ratio of cash and cash equivalents of a company to its current liabilities. It measures the ability of a business to repay its current liabilities by only using its cash and cash equivalents and nothing else. The formula is: Cash Ratio = Cash Current Liabilities

For Chevron Corporation, the cash ratio for 2010, 2011 and 2012 is: 2010: Cash Ratio = $ 31,359 $ 28,825 = 1.09 2011: Cash Ratio = $ 41,098 $ 33,260 = 1.24 2012: Cash Ratio = $ 38,812 $ 34,085 = 1.14

A cash ratio of 1.00 and above means that the business will be able to pay all its current liabilities in immediate short term. Therefore, creditors usually prefer high cash ratio. Based on the calculation, year 2011 has the highest cash ratio with 1.24 times.

LONG- TERM SOLVENCY MEASURES Long term solvency ratios are intended to address t he firm’s long run ability to meet its obligation or financial leverage.

1. Total Debt Ratio Total Debt ratio is the ratio of total asset, total equity of a business to its total assets. Total debt ratio takes into account all debts of all maturities to all creditors. The formula to calculate the debt ratio is: Total Debt Ratio = Total Assets – Total Equity Total Assets

For Chevron Corporation, the total debt ratio for 2010, 2011 and 2012 is: 2010: Total Debt Ratio = $ 184,769 -$ 105,811 $ 184,769 = 0.43 2011: Total Debt Ratio = $ 209,474 -$122,181 $ 209,474 = 0.42 2012: Total Debt Ratio = $ 232,982 -$ 137,832 $ 232,982 = 0.41

Lower value of debt ratio is favourable and a higher value indicates that higher portion of company's assets are claimed by creditors which means higher risk in operation since the business would find it difficult to obtain loans for new projects. From calculation, all result shows that total debt ratio is below than 0.5.

2. Debt-Equity Ratio Debt-to-Equity ratio is the ratio of total debt of a business to Total equity. The formula: Debt-to-Equity Ratio = Total Debt Total Equity

For Chevron Corporation, the Debt to Equity ratio for 2010, 2011 and 2012 is: 2010: Debt to Equity Ratio = $ 11,476 $ 105,811 = 0.11 2011: Debt to Equity Ratio = $ 10,152 $ 122,181 = 0.08 2012: Debt to Equity Ratio = $ 12,192 $ 137,832 = 0.09

Lower values of debt-to-equity ratio are favourable because indicating less risk. From calculation, all result shows that debt to equity ratio is below than 1.00 with 2011 is the lowest. Therefore, Chevron Corporation do not relies on external lenders that can cause high risk.

3. Equity Multiplier Equity multiplier is calculated by dividing total assets by Total equity. The formula is : Equity Multiplier = Total Assets Total Equity

For Chevron Corporation, the Equity multiplier for 2010, 2011 and 2012 is:

2010: Equity multiplier = $ 184, 769 $ 105,811 = 1.69 2011: Equity multiplier = $ 209, 474 $ 122,181 = 1.71 2012: Equity multiplier = $ 232, 982 $ 137,832 = 1.75

Higher equity multiplier leads to a higher return on equity. In the calculation, the highest equity multiplier is on 2012 that is 1.75 times.

4. Times Interest Earned Times interest earned is the ratio of earnings before interest and tax (EBIT) of a business to its interest expense during a given period. The formula is: Earnings before Interest and Tax Interest Expense

Times Interest Earned Ratio =

For Chevron Corporation, the Times Interest Earned Ratio for 2010, 2011 and 2012 is: 2010: Times Interest Earned Ratio = $ 32,055 $ 12,919 = 2.48 2011: Times Interest Earned Ratio = $ 47,634 $ 20,626 = 2.31

2012: Times Interest Earned Ratio = $ 46,332 $ 19,996 = 2.32

Higher value of times interest earned ratio is favorable meaning greater ability to repay its interest and debt. Lower values are unfavorable. For Chevron Corporation, all result shows ratio higher than 1.00 means that income before interest and tax of Chevron Corporation is enough to pay off its interest expense.

5. Cash Coverage Ratio The cash coverage ratio is useful for determining the firm’s ability to generate cash from operations and it is frequently used as measure of cash flow available to meet firm’s obligations. The EBIT plus depreciation and amortization is often abbreviated as EBITDA (Earnings before interest, taxes, depreciation and amortization). The formula is: Cash Coverage Ratio = EBITDA Interest Expenses

For Chevron Corporation, the Cash Coverage Ratio for 2010, 2011 and 2012 is: 2010: Cash Coverage Ratio = $ 32,055 + $ 13,063 $ 12,919 = 3.49

2011: Cash Coverage Ratio = $ 47,634 +$ 12,711 $ 20,626 = 2.93

2012: Cash Coverage Ratio = $ 46,332 + $13,413 $ 19,996 = 2.98

From calculation, the highest cash coverage ratio for Chevron Corporation is on 2011.

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