Question

Financial​ ratios: Financial leverage.  The financial statements for Tyler​ Toys, Inc. are shown in the popup​ window:   Calculate the debt​ ratio, times interest earned​ ratio, and cash coverage ratio for 2013 and 2014 for Tyler Toys. Should any of these ratios or the change in a ratio warrant concern for the managers of Tyler Toys or the​ shareholders?

Tyler Toys, Inc.
Income Statement for Years Ending December 31, 2013 and 2014
	2014	2013
Revenue	$14,146,494	$13,566,550
Cost of goods sold	$-8,448,154	$-8,132,959
Selling, general, and administrative expenses	$-997,530	$-981,634
Depreciation	$-1,497,830	$-1,471,612
EBIT	$3,202,980	$2,980,345
Interest expense	$-375,704	$-354,543
Taxes	$-1,074,365	$-997,805
Net income	$1,752,911	$1,627,997

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Tyler Toys, Inc.
Balance Sheet as of December 31, 2013 and 2014
ASSETS	2014	2013	LIABILITIES	2014	2013
Current assets			Current liabilities
Cash	$191,077	$187,345	Accounts payable	$1,545,788	$1,455,214
Investments	$180,531	$120,023	Short-term debt	$311,676	$333,719
Accounts receivable	$668,727	$631,504	Total current liabilities	$1,857,464	$1,788,933
Inventory	$587,152	$563,321	Long-term liabilities
Total current assets	$1,627,487	$1,502,193	Debt	$7,285,241	$6,603,887
Long-term assets			Other liabilities	$1,463,807	$1,345,856
Investments	$3,054,459	$2,828,564	Total liabilities	$10,606,512	$9,738,676
Plant, property, and equipment	$8,496,176	$8,481,193	OWNERS’ EQUITY
Goodwill	$347,867	$347,105	Common stock	$1,457,157	$1,454,866
Intangible assets	$1,158,577	$957,015	Retained earnings	$2,620,897	$2,922,528
			Total owners’ equity	$4,078,054	$4,377,394
			TOTAL LIABILITIES
TOTAL ASSETS	$14,684,566	$14,116,070	AND OWNERS’ EQUITY	$14,684,566	$14,116,070

Answer 1

1. Debt ratio = Total liabilities / total assets

2013 = $9,738,676 / $14,116,070 = 0.68

2014 = $10,606,512 / $14,684,566 = 0.72

2. Times interest earned ratio = EBIT / Interest expenses

2013 = $2,980,345 / $354,543 = 8.40 times

2014 = $3,202,980 / $375,704 = 8.52 times

3. Cash coverage ratio = (EBIT + Depreciation) / Interest expenses

2013 = ($2,980,345 + $1,471,612) / $354,543 = 12.55 times

2014 = ($3,202,980 + $1,497,830) / $375,704 = 12.51 times

Debt ratio and Times interest earned ratio is increased in 2014 as compared to 2013. Here, the more risk in cash coverage ratio.