Question

Kabutell Inc had a net income of $750,000, cash flow from financing activities of $50,000, depreciation expenses of $50,000 and cash flow from operating activities of $575,000 A) Calculate the quality of earnings ratio. What does that tell you? B) Kabutell Inc reported the following in its annual reports for 2011-2013: Cash flow from operations ( $millions) 2011: $478 2012: $403 2013: $470 Capital Expenditures: 2011: $459 2012: $447 2013: $456 Calculate the average capital acquisitions ratio over the 3-year period. How would you interpret these results? What is Kabutells quality of earnings ratio?

Answer 1

The quality of earnings ratio for Kabutell Inc is 0.77 or 77%, indicating that the net income is supported by non-cash items. The average capital acquisitions ratio over the 3-year period is 3 or 300%, suggesting that the company is investing heavily in its assets and infrastructure.

Step-by-step explanation:

The quality of earnings ratio is calculated by dividing the cash flow from operating activities by the net income. In this case, the cash flow from operating activities is $575,000 and the net income is $750,000, so the quality of earnings ratio is 0.77 or 77%.

Interpreting this ratio, a value of less than 1 indicates that the net income is supported by non-cash items like depreciation expenses, which may raise concerns about the quality of earnings.

The average capital acquisitions ratio is calculated by dividing the total capital expenditures by the average cash flow from operations. In this case, the total capital expenditures over the 3-year period are $1,362 million and the average cash flow from operations is $453 million, so the average capital acquisitions ratio is 3 or 300%.

Interpreting this ratio, a value of 3 indicates that for every $1 of cash flow from operations, the company is spending $3 on capital acquisitions. This suggests that the company is investing heavily in its assets and infrastructure.