Question

it's about long term debt paying ability ratios:

From these ratios ( Times interest earned ratio - Fixed charge
coverage ratio - debt raio) , which would you choose to use?
why?

Answer #1

Ans:

To check the long term debt paying ability ratios, Times interest earned ratio to be checked because:

Times interest earned ratio = Earnings Before Interest and Taxes / Total Interest Expense

When EBIT is sufficient enough to realise that the company will have sufficient profits by the time the debts are due, so that the payments of the debts can be done easily. It will help in checking the company's ability to pay debts in future. If the Times interest earned ratio is less than one than it is difficult for company to pay their debts on time.

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Mr. Reid has asked you to advise him of the long-term debt
position of the Locksmith Corporation.
He provides you with the ratios indicated below.
2004
2005
2006
Fixed Charge Coverage
6.2
4.4
4.9
Times Interest Earned
8.1
5.9
5.2
Debt Ratio
39%
38%
39%
Debt to Tangible Net Worth
79%
80%
83%
Required:
Give the implications and limitations of each item separate and
then the collective inference one may draw about the Locksmith
Corporation's long-term debt-paying ability.

Write on the most important 5 ratios that measure the long –term
debt –paying ability, showing the name of the ratio, its numerator
and denominator. *

6. A firm’s times interest earned ratio is 3 but its cash flow
to long-term debt ratio is only 0.75. Taken together, does this
information mean that a long-term lender should be concerned about
lending this firm money long term?

The Interest Coverage (or Times Interest Earned)
Ratio
This ratio indicates a business' ability to pay the interest on
its debt. It is calculated:
EBIT / Interest Expense
which is easy to remember if you remember those two accounts on
the income statement. EBIT is usually the line immediately before
interest expense.
The Preferred Dividend Coverage Ratio
Like the Interest Coverage Ratio, this ratio indicates a
business' ability to pay dividends to its preferred shareholders.
It is calculated:
Net Income...

Long-term debt ratio
0.1
Times interest earned
8.0
Current ratio
1.4
Quick ratio
1.0
Cash ratio
0.4
Inventory turnover
4.0
Average collection period
73
days
Use the above information from the tables to work out the
following missing entries, and then calculate the company’s return
on equity. Note: Turnover and the average collection period are
calculated using start-of-year, not average, values. (Enter
your answers in millions. Round intermediate calculations and final
answers to 2 decimal places.)
Long-term debt ratio
0.1...

The difference between fixed charge coverage and times
interest earned ratio is
A- tax expense
B- noncontrolling interest
C- the interest portion of rental
D- all fixed costs
The cash ratio
A- is cash equivalents plus marketable securities
divided by current liabilities
B- compares cash to accounts payable
C- is not useful as a measure of short term
liquidity
D- is not recommended for use with speculative
companies

1) What is the measure of indebtedness?
Quick ratio
Current ratio
Times interest earned
Debt ratio
2) Do you want this measure higher or lower?
Higher
Lower

long-term debt ratio = long-term debt/longterm debt + total
equity
Why this ratio might be of interest to investors or creditors,
what this ratio tells us and whether the company is performing
better or worse to the prior fiscal year. --> F18 = 42% , F19 =
40%

Assigning a Long-Term Debt Rating Using Financial
Ratios
Refer to the information below from Nordstrom Inc.’s 2016
financial statements. Use the information to answer the
requirements ($ millions).
Sales
$14,095
Depreciation expense
560
Tax expense
376
Interest expense, gross
153
Earnings from continuing operations (Net income)
600
EBITA
1,117
Cash
595
Average total assets
8,472
Total debt
2,805
Noncurrent deferred tax liabilities
324
Noncontrolling interest
0
Equity
871
Dividends paid
1,185
Cash from operating activities
2,451
a. Compute the following...

Ratios and Fixed Assets [L{)2] The Maurer company has a
long-term debt ratio of .35 and a current ratio of 1.30. Current
liabilities are $955, sales 'are $7,210, profit margin is 8.3
percent, and RoE is 17.5 percent. what is the amount of the firm's
net fixed assets?

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