It€™s probably safe to say that there€™s nothing more important in determining a bond€™s rating than the underlying financial condition and operating results of the company issuing the bond. Just as financial ratios can be used in the analysis of common stocks, they can also be used in the analysis of bonds€”a process we refer to as credit analysis. In credit analysis, attention is directed toward the basic liquidity and profitability of the firm, the extent to which the firm employs debt, and the ability of the firm to service its debt.

The financial ratios shown above are often helpful in carrying out such analysis. The first 2 ratios measure the liquidity of the firm, the next 2 its profitability, the following 2 the debt load, and the final 2 the ability of the firm to service its debt load. (For ratio 5, the lower the ratio, the better. For all the others, the higher the ratio, and the better.) The table lists each of these ratios for 6 companies.
Questions
a. Three of these companies have bonds that carry investment-grade ratings. The other 3 companies carry junk-bond ratings. Judging by the information in the table, which 3 companies have the investment-grade bonds and which 3 have the junk bonds? Briefly explain your selections.
b. One of these 6 companies is an AAA-rated firm and one is B-rated. Identify those companies. Briefly explain your selections.
c. Of the remaining 4 companies, 1 carries an AA rating, 1 carries an A rating, and 2 have BB ratings. Which companies are they?

A Table of Financial Ratios (All ratios are real and pertain to real companies.) Company Company 2 1.39 X Company Company Company 5 Company Financial Ratio 1. Current ratio 2. Quick ratio 3. Net profit margin 4. Return on total capital 5. Long-term debt to total capital 6. Owners' equity ratio 7. Pretax interest coverage 8. Cash flow to total debt 3 4 1.78 1.03 x 0.50 X 5.9% 1.13 X 0.48 X 4.6% 15.0% 633% 18.6% 2.3 x 1.32 X 0.33 X 28% 11.5% 370% 1.5% 1.7 X 20.4% 1.41 X 0.75 X 10.0% 28.4% 42.1% 21.2% 6.4 X 42.7% 0.84 X 0.93 X 12.9% 25.9% 52.7% 18.9% 4.5 X 48.8% 14.5% 29.4% 23.9% 44.1 % 8.9 X 71.2% 16.8% 88.6% 5.1% 2.4 X 34.7% 302%