Debt Service Ratios

Question 1

Debt service ratios

Answer 1

Provide an indication of a company’s long term solvency.
Measure the overall use of debt
Also called leverage ratios or financial stability ratios

Question 2

Debt ratio

Answer 2

Total liabilities/total assets

Used to assess the amount of leverage being used to finance assets
Low ratio: the organization is less dependent on leverage
High ratio: more leveraged and considered more financially risky

Question 3

Debt-to-equity

Answer 3

Total liabilities/equity

Measurement of how much suppliers, lenders, and other creditors have committed to the organization versus what owners have committed.

Low ratio means less leverage and stronger equity position

Question 4

Debt service coverage

Answer 4

Net operating income/(principal + interest payments)

Measure of how much cash, after expenses are covered, is available to pay debt

Question 5

Times-interest-earned ratio

Answer 5

EBIT/interest expenses

Measures the ability to pay interest expenses from income

Lower the ratio, the more income is burdened by debt expense