Key ratios: capital structure

Question 1

Name key ratios: capital structure

Answer 1

Equity ratio: total equity x 100/ total capital

Debt leverage ratio: total liabilities x 100/ total capital

Leverage structure: current liabilities x 100/ total liabilities

Debt gearing ratio: total liabilities x 100/ total equity

Question 2

Equity ratio

Answer 2

Equity ratio: Total equity x 100/ total capital

• Should be around 20-30%

> > > The more equity -> better creditworthiness -> higher financial stability -> more independent from lenders
But: equity is more expensive than debt, a high equity ratio depresses the return on capital employed

Question 3

Debt leverage ratio

Answer 3

Debt leverage ratio: total liabilities x 100/ total capital

• possible statements about financial stability
• growth of thi ratio should always be considered together with the companys assets (if these include hidden liabilities as a result of lower market values -> negative impact on leverage ratio)

> > > high ratio “bad”

Question 4

Leverage structure

Answer 4

Leverage structure: current liabilities x 100/ total liabilities

• expresses what percentage of total liabilities will actually lead to a cash outflow to external creditors on a short term basis

> > > Increased percentage of leverage structure rather in companies that are in danger of inxolvency than solvent companies

Question 5

Debt gearing ratio

Answer 5

Debt gearing ratio: Total liabilities x 100/ Total equity

• Shows the relationship between a companys debt and equity financing
• Should never be considered alone -> always in connection with the company’s earnings position (leverage effect -> return on equity)

> > > The higher the gearing ratio, the more dependent a company is on external creditors