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Assigning a Long-Term Debt Rating Using Financial Ratios

Refer to the information below from Nordstrom Inc.’s 2016 financial statements. Use the information to answer the requirements ($ millions).

Sales $15,093
Depreciation expense 578
Tax expense 394
Interest expense, gross 171
Earnings from continuing operations (Net income) 685
EBITA 1,256
Cash 613
Average total assets 9,470
Total debt 2,908
Noncurrent deferred tax liabilities 391
Noncontrolling interest 0
Equity 871
Dividends paid 1,185
Cash from operating activities 2,451

a. Compute the following seven Moody’s metrics for Nordstrom. See Appendix 4A for definitions.

Round answers to one decimal place (example for percentage answers: 0.2345 = 23.5%).

Ratio 2016
EBITA to average assets Answer%
Operating margin Answer%
EBITA margin Answer%
EBITA interest coverage Answer
Debt to EBITDA Answer
Debt to book capitalization Answer%
Retained cash flow to net debt Answer%

b. Use your computations from part a, along with measures in Exhibit 4.7, to estimate the long-term debt rating for Nordstrom.

Based on the above computations, the rating for Nordstrom's long-term debt would fall in the AnswerAaa - Aa rangeA - Baa rangeBa - B rangeCaa - C range

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