Long-Term Debt Paying Ability Ratios

Question 1

What is the formula for the Times interest earned?

Answer 1

Times Interest Earned:

        Interest Expenses

Question 2

what does the Times Interest Earned indicates?

Answer 2

it indicates long-term paying ability from the IS view
HOW MANY TIMES OPERATING INCOME CAN COVER INTEREST EXPENSES

Question 3

What is the Formula for Debt Ratio

Answer 3

Debt Ratio:

Total assets

Question 4

What does the Debt Ratio indicates?

Answer 4

A firm’s Long-Term debt paying ability

INDICATES THE PERCENTAGE OF ASSETS FINANCED BY OUTSIDE CREDITORS AND HOW WELL CREDITORS ARE PROTECTED

[The Lower The better]

Question 5

What is the formula for Debt to Equity Ratio?

Answer 5

Shareholders’ Equity

Question 6

What does the Debt to Equity Ratio indicates?

Answer 6

Determines the entity’s long-term debt-paying ability and how well creditors are protected in case of solvency

INDICATES HOW MUCH DEBT A COMPANY IS USING TO FINANCE ITS ASSETS RELATIVE TO THE AMOUNT OF VALUE REPRESENTED IN SHAREHOLDERS’ EQUITY

Question 7

What are the ranges for the Debt Equity Ratio

Answer 7

=1 creditors and stockholders equally contribute to the assets of the business

<1 proportion of assets provided by stockholders is higher than one provided by creditors

> 1 proportion of assets provided by creditors is higher than the

Question 8

What is the Formula for Debt To Tangible Net Worth Ratio?

Answer 8

Shareholders’ Equity - Intangible Assets

Question 9

What does the Debt To Tangible Net Worth Ratio means?

Answer 9

Determines entity’s long-term debt payment ability and indicates how well creditors are protected in case of the firms’s insolvency

it’s more conservative than Debt Ratio and debt to equity ratio sue to exclusion of intangibles

[The lower the better]