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Debt Ratios measure the company's ability to repay its long-term debt commitments. They are used to calculate the company's financial leverage. Leverage refers to the amount of money borrowed in order to maintain the stable/steady operation of the organization.
The Ratios that fall under this category are:
1. Debt Ratio
2. Debt to Equity Ratio
3. Interest Coverage Ratio
4. Debt Service Coverage Ratio
Debt Ratio:
Debt Ratio is a ratio that indicates the percentage of a company's assets that are provided through debt. Companies try to maintain this ratio to be as low as possible because a higher debt ratio means that there is a greater risk associated with its operation.
Formula:
Debt Ratio = Total Liability / Total Assets
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Which financial ratios are used by banks?
1. Liquidity Ratios - Ability of the company to pay off debt 2. Activity Ratios - How quickly a firm can convert its non-cash assets to cash assets 3. Debt Ratios - Ability of the firm to repay long-term debt 4. Profitability Ratios - To Measure the firms use of its assets and control of its expenses to generate an acceptable rate of return 5. Market Ratios - To Measure the investor response to owning a company's stock and also the cost of issuing stock
What is the maximum debt to income ratios for a Freddie Mac loan?
45
Which group of ratios shows the extent to which the firm is financed with debt?
liquidity ratio
What is the purpose of the liquidity ratio?
Liquidity ratios measure the availability of cash to pay debt
What is targeted to borrowers with low credit scores high debt to income ratios or signs of a reduced ability to repay the money they borrow?
A _____ is targeted to borrowers with low credit scores, high debt-to-income ratios or signs of a reduced ability to repay the money they borrow
What are the Advantages and disadvantages of public debt?
The biggest disadvantage of public debt is the fear of it leading to excessive inflation. The advantage of public debt is the leveraging of public assets to provide services.
Which financial ratios are used by banks?
1. Liquidity Ratios - Ability of the company to pay off debt 2. Activity Ratios - How quickly a firm can convert its non-cash assets to cash assets 3. Debt Ratios - Ability of the firm to repay long-term debt 4. Profitability Ratios - To Measure the firms use of its assets and control of its expenses to generate an acceptable rate of return 5. Market Ratios - To Measure the investor response to owning a company's stock and also the cost of issuing stock
What is the maximum debt to income ratios for a Freddie Mac loan?
45
TYPES OF financial statement analysis?
There are numerous financial ratios use to analyse different aspects of a company's financial performance Profitability ratios * Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return. * Gross margin, Gross profit margin or Gross Profit Rate * Operating margin, Operating Income Margin, Operating profit margin or Return on sales (ROS) * Profit margin, net margin or net profit margin * Return on equity (ROE) * Return on investment (ROI ratio or Du Pont ratio) * Return on assets (ROA) * Efficiency ratio * Net gearing Liquidity ratios Liquidity ratios measure the availability of cash to pay debt. * Current ratio * Acid-test ratio (Quick ratio) * Operation cash flow ratio Activity ratiosActivity ratios measure the effectiveness of the firms use of resources. * Average collection period * DSO Ratio * Average payment period * Asset turnover * Inventory turnover ratio * Receivables Turnover Ratio * Inventory conversion ratio * Inventory conversion period * Receivables conversion period * Payables conversion period Debt ratios (leveraging ratios) Debt ratios measure the firm's ability to repay long-term debt. Debt ratios measure financial leverage. * Debt ratio * Debt to equity ratio * Long-term Debt to equity (LT Debt to Equity) * Times interest-earned ratio * Debt service coverage ratio Market ratios Market ratios measure investor response to owning a company's stock and also the cost of issuing stock. * Earnings per share (EPS) * Payout ratio * Dividend cover (the inverse of Payout Ratio) * P/E ratio * Dividend yield * Cash flow ratio or Price/cash flow ratio * Price to book value ratio (P/B or PBV) * Price/sales ratio * PEG ratio
Which group of ratios shows the extent to which the firm is financed with debt?
liquidity ratio
What is debt management ratios?
Debt management ratio is best explained by saying this is the amount of debt you have, versus the amount of money you are bringing in, or are able to pay every month.
What is the purpose of the liquidity ratio?
Liquidity ratios measure the availability of cash to pay debt
Is targeted to borrowers with low credit scores high debt to income ratios or signs of a reduced ability to repay money they borrow?
A _____ is targeted to borrowers with low credit scores, high debt-to-income ratios or signs of a reduced ability to repay the money they borrow
What is targeted to borrowers with low credit scores high debt to income ratios or signs of a reduced ability to repay the money they borrow?
A _____ is targeted to borrowers with low credit scores, high debt-to-income ratios or signs of a reduced ability to repay the money they borrow
What is the formula of leverage ratios?
One measure of leverage is Debt (or Liabilities) divided by Equity. The higher the figure, the greater is the leverage or reliance on debt to create shareholders equity.
Why is a company's capital structure as measured by debt and equity ratios important to financial statement analysts?
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What ratios is least useful in a evaluting a company's ability to pay its current debts as they become due?
debt to equity ratio
