The document defines and explains various financial ratios used to evaluate a company's debt, profitability, and ability to service debt. These include the debt ratio, times interest earned ratio, fixed payment coverage ratio, gross profit margin, net profit margin, earnings per share, return on assets, and return on equity. The ratios are calculated using elements of the income statement and balance sheet to measure the degree of leverage, coverage of debt payments, and profit generated from sales and assets.
The document defines and explains various financial ratios used to evaluate a company's debt, profitability, and ability to service debt. These include the debt ratio, times interest earned ratio, fixed payment coverage ratio, gross profit margin, net profit margin, earnings per share, return on assets, and return on equity. The ratios are calculated using elements of the income statement and balance sheet to measure the degree of leverage, coverage of debt payments, and profit generated from sales and assets.
The document defines and explains various financial ratios used to evaluate a company's debt, profitability, and ability to service debt. These include the debt ratio, times interest earned ratio, fixed payment coverage ratio, gross profit margin, net profit margin, earnings per share, return on assets, and return on equity. The ratios are calculated using elements of the income statement and balance sheet to measure the degree of leverage, coverage of debt payments, and profit generated from sales and assets.
total long-term and short-term debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company's assets that are financed by debt. Debt Position This indicates the amount of other peoples money being used to generate profits. The more debt a firm has, the higher risk it has of being unable to meet its contractual debt payments and becoming bankrupt. Financial Leverage Financial leverage is the magnification of risk and return introduced through the use of fixed cost financing. Degree of Indebtedness Measures the amount of debt relative to other significant balance sheet amounts. Ability to Service Debt The ability of the firm to make the payments required on a scheduled basis over the life of the debt. Debt Ratio Formula DEBT RATIO = Total Liabilities / Total Assets The higher the ratio, the greater the firms degree of indebtedness and the more financial leverage it has. Times Interest Earned Ratio This measures the firms ability to make contractual interest payments. Times Interest Earned Ratio = Earnings Before Interest and Taxes / Interest The higher its value, the better chance that the firm will fulfill its interest obligations. Fixed Payment Coverage Ratio This measures the firms ability to meet all fixed payment obligations. FPCR = Earnings Before Interest and Taxes + Lease Payments / Interest + Lease Payments + {(Principal Payments + Preferred Stock Dividends) X [1/(1-T)]} Lower ratio means greater risk to both lenders and owners. Profitability Ratio Profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings compared to its expenses and other relevant costs incurred during a specific period of time. Gross Profit Margin Measures the percentage of each sales remaining after the firm has paid for its goods. Gross Profit Margin = Sales Cost of Goods Sold / Sales Gross Profits / Sales Operating Profit Margin Measures the percentage of each sales remaining after all costs and expenses other than interest, taxes, and preferred stock dividends are deducted. Operating Profit Margin = Operating Profits / Sales Net Profit Margin This measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends have been deducted. Net Profit Margin = Earnings Available for Common Stockholders / Sales Earnings Per Share This represents the number of earnings generated during the period on behalf of each outstanding share of common stock. EPS = Earnings available for common stockholders / Number of Shares of Common Stock Outstanding This is considered as an important indicator of corporate success Return on Total Assets Also called as return on investments, this measures the overall effectiveness of management in generating profits with its available assets. ROA = Earnings available for common stockholders / Total Assets Return on Common Equity This measures the return earned on common stockholders investment of the firm. ROE = Earnings Available for Common Stockholders / Common Stock Equity