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Analyzing Financial Statements > Debt Management Ratios
Debt Management Ratios
• Total Debt to Total Assets
• Times-Interest-Earned Ratio
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Analyzing Financial Statements > Debt Management Ratios
Total Debt to Total Assets
• The debt ratio measures the firm's ability to repay long-term debt by indicating the
percentage of a company's assets that are provided via debt.
• Debt ratio = Total debt / Total assets.
• The higher the ratio, the greater risk will be associated with the firm's operation.
Debt
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Analyzing Financial Statements > Debt Management Ratios
Times-Interest-Earned Ratio
• Times interest earned (TIE) or Interest Coverage ratio is a measure of a
company's ability to honor its debt payments. It may be calculated as either EBIT
or EBITDA divided by the total interest payable.
• Interest Charges = Traditionally "charges" refers to interest expense found on the
income statement.
• EBIT = Revenue – Operating expenses (OPEX) + Non-operating income.
• EBITDA = Earnings before interest, taxes, depreciation and amortization.
• Times Interest Earned or Interest Coverage is a great tool when measuring a
company's ability to meet its debt obligations.
Interest
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Appendix
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Analyzing Financial Statements
Key terms
• debt to total assets ratio after tax income divided by liabilities
• goodwill Goodwill is an accounting concept meaning the value of an asset owned that is intangible but has a quantifiable
"prudent value" in a business for example a reputation the firm enjoyed with its clients.
• Non-operating income Non-operating income, in accounting and finance, is gains or losses from sources not related to the
typical activities of the business or organization. Non-operating income can include gains or losses from investments, property
or asset sales, currency exchange, and other atypical gains or losses.
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Analyzing Financial Statements
Debt
Debt ratio is an index of a business operation.
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Analyzing Financial Statements
Interest
Interest rates of working capital financing can be largely affected by discount rate, WACC and cost of capital.
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Analyzing Financial Statements
Which of the following statements about the total debt to total
assets ratio is NOT true?
A) The debt ratio is calculated by dividing a company's total liability by its
total assets.
B) A highly leveraged company could be in danger if its creditors demand
repayment.
C) The higher the total debt to total asset ratio, the greater the financial
risk.
D) If a company's debt to asset ratio is less than 0.5, most of its assets
are financed through debt.
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Analyzing Financial Statements
Which of the following statements about the total debt to total
assets ratio is NOT true?
A) The debt ratio is calculated by dividing a company's total liability by its
total assets.
B) A highly leveraged company could be in danger if its creditors demand
repayment.
C) The higher the total debt to total asset ratio, the greater the financial
risk.
D) If a company's debt to asset ratio is less than 0.5, most of its assets
are financed through debt.
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Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Analyzing Financial Statements
A company has $1,325,000 in revenue, $1,000,000 in operating
expenses, $25,000 in non-operating income, and $200,000 in
interest charges. What is the company's TIE, and should the
company be concerned about its ability to meet its debt
obligations?
A) Its ratio is 1.75 and it should not be concerned.
B) Its ratio is 6.75 and it should be concerned.
C) Its ratio is 6.75 and it should not be concerned.
D) Its ratio is 1.75 and it should be concerned.
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Analyzing Financial Statements
A company has $1,325,000 in revenue, $1,000,000 in operating
expenses, $25,000 in non-operating income, and $200,000 in
interest charges. What is the company's TIE, and should the
company be concerned about its ability to meet its debt
obligations?
A) Its ratio is 1.75 and it should not be concerned.
B) Its ratio is 6.75 and it should be concerned.
C) Its ratio is 6.75 and it should not be concerned.
D) Its ratio is 1.75 and it should be concerned.
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Analyzing Financial Statements
Attribution
• Wikipedia. "Debt ratio." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Debt_ratio
• Wikipedia. "Financial ratio." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Financial_ratio#Debt_ratios_.28leveraging_ratios.29
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//accounting/definition/debt-to-total-assets-ratio
• Wiktionary. "goodwill." CC BY-SA 3.0 http://en.wiktionary.org/wiki/goodwill
• Wikipedia. "Non-operating income." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Non-operating%2520income
• Wikipedia. "EBITDA." CC BY-SA 3.0 http://en.wikipedia.org/wiki/EBITDA
• Wikipedia. "Times interest earned." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Times_interest_earned
• Wikipedia. "Earnings before interest and taxes." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Earnings_before_interest_and_taxes
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