Question

Please write three complete and well-composed paragraphs in which you discuss, as an example, a company that currently operates where you live. Describe how the financial ratios of debt-to-assets, times-earned-interest, and debt-to-equity would be useful to the business leaders of this company.

Answer 1

1)

It is one of the most important ratios that tell the long term solvency of any company. By long term solvency here we mean that to what extent a company will be able to meet its debt liabilities over a longer period of time (generally more than a year). We can further clarify the importance of the same by analysing the formula of the ratio which is as follows:-

Debt to Asset ratio = Total debt/ Total Assets

It's clear from the formula that this ratio basically reprints the proportion of total debts with the total assets of the company. This implies that it measures the amount of total assets that are financed by creditors in other words it can also be termed as a leverage ratio because it shows that how much assets are being financed by creditors as compared to the percentage of resources financed by investors.