Debt management ratios

Debt management ratios, also known as leverage ratios, show the extent to which a company is financed with debt. Companies that are financed with debt, rather than equity, must pay principal and interest on the debt at regular time periods. If they are unable to pay back these loans on time, creditors can force the firm to accelerate repayment or force it into bankruptcy. In many instances, loan covenants require companies to maintain certain ratio targets or go into default of the loan. Most long-term debt obligations contain covenants related to secured debt levels. 

Debt management ratios are important to creditors. Before extending loans to companies, creditors need to know if the company can pay back the loan principal plus interest. The debt management ratios help determine this. 

Leverage ratios a measure of a company s overall debt burden Activity ratios a measure of how effectively a company manages its assets Profitability ratios an indication of a firm s total operating performance, which is a combination of asset and income management... 

Companies and management are evaluated on many outcomes and operations functions can directly impact a company s financial performance. Companies are evaluated on their ability to pay current bills, profitability, management of assets and debts, and the valuation of the company. Operations and supply chain managers have a significant impact on a company s cash flow, profitability, debt burden, utilization of assets, and its ability to remain in business. Operational decisions and actions will be reflected on a company s financial statements and subsequent performance ratios. Table 4.5 provides a summary of the performance ratios that were introduced in this chapter. 

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