Download Analysis of Long-Term Debt-Paying Ability: Interest & Coverage Ratios and more Slides Business Administration in PDF only on Docsity! Chapter 7, Slide #1 Times Interest Earned Recurring Earnings, Excluding Interest Expense, Tax Expense, Equity Earnings, and Minority Earnings Interest Expense, Including Capitalized Interest docsity.com Chapter 7, Slide #2 Times Interest Earned (cont’d) • Indicates long-term debt-paying ability • Consider only recurring income – Exclude discontinued operations – Exclude extraordinary items • Exclude (add back) to income – Interest expense – Income tax expense – Equity losses (earnings) of nonconsolidated subsidiaries – Minority loss (income) • Include interest capitalized docsity.com Chapter 7, Slide #5 Fixed Charge Coverage • Ratio trend is usually similar to trend of times- interest-earned ratio Recurring Earnings, Excluding Interest Expense, Tax Expense, Equity Earnings, and Minority Earnings + Interest Portion of Rentals Interest Expense, Including Capitalized Interest + Interest Portion of Rentals docsity.com Chapter 7, Slide #6 Fixed Charge Coverage (cont’d) • Fixed charges include – Interest portion of operating lease payments • General approximation: 1/3 of payments • SEC requires specific calculation using lease terms – May also include • Depreciation, depletion, and amortization • Debt principal payments • Pension payments • Substantial preferred stock dividends • The more items included as “fixed charges,” the more conservative the ratio docsity.com Chapter 7, Slide #7 Debt Ratio • Indicates the percentage of assets financed by creditors • Comparisons – Industry competitors and averages • Variations in application – Short-term liabilities • Not part of long-term source of funds: exclude • Part of the total source of funds: include – Liabilities that do not necessarily represent a commitment to pay out funds in the future Total Liabilities Total Assets docsity.com Chapter 7, Slide #10 Debt/Equity Ratio • Helps determine how well creditors are protected in case of insolvency • Comparisons – Industry competitors and averages Total Liabilities Shareholders' Equity docsity.com Chapter 7, Slide #11 Debt to Tangible Net Worth Ratio • Determines the entity’s long-term debt payment ability • Indicates how well creditors are protected in case of the firm’s insolvency • More conservative than debt ratio or debt/equity ratio due to exclusion of intangibles Total Liabilities Shareholders' Equity - Intangible Assets docsity.com Chapter 7, Slide #12 Other Long-Term Debt-Paying Ability Ratios • Current debt/net worth ratio – The relationship between current liabilities and funds contributed by shareholders • Total capitalization ratio – Compares long-term debt to total capitalization – Total capitalization: long-term debt, preferred stock, and common stockholders’ equity • Fixed asset/equity ratio – The extent to which shareholders have provided funds in relation to fixed assets docsity.com