Question

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.

Answer 1

Answers

a)

1)Times Interest Earned

The Implications of Time Interest Earned Ratio.

The Times Interest Earned ratio measures the company’s ability to pay off its interest expense from the current year earnings i.e Earning before interest and tax.

The Times Interest Earned = Earnings before interest and Tax/Interest Expenses

The Times Interest Earned Ratio has increased year on year it implies that the company has sufficient earnings to meet current obligations.

The Limitation of Times Interest Earned Ratio

1) It does not consider fixed financial payments other than interest.