Question

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?

Answer #1

Yes, long term debt ratio of 75% means that only 25% assets are financed through equity, which means debt to equity ratio is 3. Also interest earned ratio is the ratio of EBIT by interest expense. An interest earned ratio of only 3 means that pays 1/3 of its earnings before interest and taxes in interest already.

It means that the capacity of the firm to borrow more money is weak and hence, a long-term lender should be concerned about lending money to this firm.

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?

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...

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a.
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