Debt-to-assets ratio

From a leverage standpoint, the fixed-charge coverage and times interest earned are a bit low. The debt-to-asset ratio is about average. The company needs to reduce fixed or interest charges or increase profit or income. 

The debt ratio, sometimes called total debt ratio or debt-to-assets ratio, shows how much of the company s funds come from sources other than equity. 

Industry Return on equity (%) Return on assets (%) Debt-to-equity ratio... 

Another economic indicator, the debt-to-capital ratio, is defined as the long-term debt divided by the total capital. This ratio is an indication of how highly leveraged a company might be. The ratios for a selected industries are found in Table 8.33. The ratios for these companies have been relatively constant in the range of 0.27 to 0.42 over a 10 year period (1984-1994). As an example of how the debt-to-equity ratio affects the return on equity, let us consider two companies.. Company A has a debt-to-equity ratio of 0.35, and company B s ratio is 0.80 (see Table 8.34). Assume that the interest rate on debts is 10% and that each company earns 30 cents per dollar of capital before income tax and interest. The problem is solved by assuming that debt plus equity equals capital assets, which... 

Debt-to-equity ratio Debt-to-assets/(l - Debt- = 0.6852/(1-0.6852) =... 

In addition to financial sfafemenf analysis, e.g., horizonfal analysis, the rate-of-debt-to-total-assets raho and the hmes-interest-earned ratio can be used to evaluate the capital structure and strategic financial strengths and weaknesses of an enterprise. 

The rate-of-debt-to-total-assets ratio is an indicator of the percentage of assets that are financed by creditors and the extent to which financial leverage is employed. This ratio also reflects the importance of borrowed funds and the owner s investment to the creditor, and a large debt percentage is usually viewed as an unfavorable financial condition. Table 9.17 presents the calculation of this ratio. 

Table 9.17 Rate-of-Debt-to-Total-Assets Ratio...

The current ratio is defined as current assets divided by current liabilities. It is an indication of the ability of a company to meet short-term debt obligations. The higher the current ratio, the more liquid the company is. However, too high a ratio may indicate that the company is not putting its cash or equivalent cash to good use. A reasonable ratio is two, but it is better to compare current ratios of companies in a similar business. From Table 16.3, the current assets ratio of U.S. Chemicals is 4,630/4,153 = 1.11, which is alow value. At the end of the year 2000, Monsanto Company had a much better current ratio of 1.80. 

XYZ Securities will construct a cash flow model to estimate the size of the issued notes. The model will consider historical sales values, any seasonal factors in sales, credit card cash flows, and so on. Certain assumptions will be made when constructing the model, for example, growth projections, inflation levels, tax levels, and so on. The model will consider a number of different scenarios, and also calculate the minimum asset coverage levels required to service the issued debt. A key indicator in the model will be the debt service coverage ratio (DSCR). The more conservative the DSCR, the more comfort there will be for investors in the notes. For a residential mortgage deal, this ratio might be approximately... 

The other notable difference between RMBS and CMBS is that the CMBS is a non-recourse loan to the issuer as it is fully secured by the underlying property asset. Consequently, the debt service coverage ratio (DSCR) becomes crucial to evaluating credit risk. 

Liquidity ratios are a measure of a company s ability to pay its shortterm debts. Current ratio is obtained by dividing the current assets by the current liabilities. Depending on the economic climate, this ratio is 1.5 to 2.0 for the chemical process industries, but some companies operate closer to 1.0. The quick ratio is another measure of liquidity and is cash plus marketable securities divided by the current liabilities and is slightly greater than 1.0. 

Stockholders equity = total assets - total debt Equations (9-130) and (9-136) can be combined to give net annual profit total assets - total debt Equation (9-137) can also be written to include a quantity called the debt ratio (DR), which gives... 

Alfhough the current ratio is valuable, an organizahon may wish to go further to evaluate liquidity. The acid-test or quick ratio is a means to consider only the most liquid of fhe currenf assets and determine whether the firm can pay its short-term debt even more quickly. The formula for the quick ratio is ... 

Only the most liquid of assets are included in this ratio, and the best ratio is usually 1 1, but this varies with the industry concerned. Table 9.12 calculates the acid-test ratio. Although the Blue company has a better current ratio than the Gold company, it does not have a better acid-test ratio, and, therefore, may have to sell its inventory at discounted prices in order to raise cash for current debt that is due. The Gold company, which did not have a favorable current ratio, does have an acceptable acid-test ratio because most of its current assets are in cash, accounts receivable, and marketable securities. 

Figure 122 shows an estimate of ammonia production costs at various locations. In this figure the capital-related costs are based on a debt/equity ratio of 60/40. With 6 % depreciation of fixed assets and spare material, 8 % interest on debts and 16 % ROI on equity, corresponding to a total of about 16.5 % of the total capital involved. The total capital includes the LSTK price for plant and storage, cost of the off-sites for an industrialized site, in-house project costs, spare parts and catalyst reserves, working capital. 

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