Question

​​​​Calculate the debt ratio of an industrial equipment manufacturer, such as Illinois Tool Works, Inc. Then...

​​​​Calculate the debt ratio of an industrial equipment manufacturer, such as Illinois Tool Works, Inc.

Then calculate the debt ratio of a service oriented company, such as Cognizant Technology Solutions.

what would account for the difference in their debt ratios?

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Answer #1

DEBT ratio for year 2018 of Illinois tool Works = Total Debt/Total Assets = 11612000/14870000 = 0.78
DEBT ratio for year 2018 of Cognizant = Total Debt/Total Assets = 4489000/15913000 = 0.28

Since Illinois Tools is a manufacturing company it is capital intensive industry needing lot of investments on plan machinery which is serviced by debt . Moreover inventory levels are lot higher in Illinois tool works whereas there is no inventory in Cognizant since it is part of IT industry.

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