Leverage Analysis

Question 1

What is the focus of solvency ratios?

Answer 1

Focus on a company’s long term financial health and its ability to meet long-term obligations

Question 2

What is focus of liquidity ratios?

Answer 2

Assess a company’s short-term cash position and its ability to handle immediate financial needs and obligations.

Question 3

Why would a company increase debt as opposed to equity?

Answer 3

1. Retaining ownership control
2. Cost of capital
3. Flexibility
4. Timing and availability
5. Tax Advantage

Question 4

Asset to Equity Ratio

Answer 4

Total Assets/Total S/E - Measures how much of an asset base is funded by and equity and indirectly by debt

Question 5

Liabilities to Equity

Answer 5

Total Libilities/Total Equity - helps analyze a company’s capital sturcure

Question 6

Debt to Equity

Answer 6

Interest Bearing Liabilities/Total S/E - Allows us to precisely compare a company’s debt financing to equity financing.

Question 7

Debt to tangible net worth

Answer 7

Interest Bearing Liabilities/Total S/E - Intangible Assets - more conservative approach to company’s financial state

Question 8

Debt to EBITDA

Answer 8

Interest Bearing Debt/EBITDA - Shows how much actual cash flow a company has to cover its debt and other liabilities. (high would indicate higher financial risk)

Question 9

Net Debt to EBITDA

Answer 9

Interest Bering Debt - Cash/EBITDA - Shows how long a company would need to operate at its current level to pay off all its debt.