Leverage/debt management ratios Flashcards
What is one objective of leverage ratios?
They measure the extent to which a company is funded by debt in comparison to equity.
What is another objective of leverage ratios?
They can also be used to establish how well a company is able to repay the interest expense incurred as a result of debt.
What is the debt-to-equity ratio formula?
(total debt / total equity) x 100
What does a high debt-to-equity ratio indicate?
That a company is financed by debt more so than equity.
What is the total gearing ratio formula?
(Non-current liabilities / Capital employed) x 100
What is the capital employed formula?
Equity + non-current liabilities
What does total gearing ratio indicate?
How much a company’s operations are financed by debt as compared to equity.
True or false: the debt-to-equity ratio indicates to which degree a company’s operations are financed by debt as compared to equity.
False - that description belongs to the total gearing ratio.
What is the interest cover ratio?
EBIT / interest expense
What is EBIT?
Earnings Before Interest and Tax
Which leverage ratio is presented as times?
The interest cover ratio.
Is it better for a company’s interest cover ratio to be high or low?
High - this indicates greater capacity to cover interest.
