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Wednesday, 11 January 2012

Financial Ratio Analysis: Leverage Ratios

Leveraging means taking out a loan so that you can invest the money and hoping your investment makes more money than you will have to pay in interest on the loan.
The leveraging ratio is used to calculate the financial leverage of a company.
There are several different ratios, but the main factors looked at include debt,equity,assets and interest expenses. These ratios are another measure of financial health of a company.These ratios concerned with short-term assets and liabilities.
Debt Ratio:The Debt ratio measures the extent to which a firm has financed its assets with non-owner sources of fund. Debt Ratio depends on the classification of long-term leases.

Debt Ratio=Total debt/total assets

Debt/Equity Ratio: The most important Ratio is the Debt-Equity Ratio compares a company's total liabilities to its total share holders equity. This is the measurement of how much suppliers, lenders, creditors have committed to the company versus what the share holders have committed.

Debt/equity ratio=(Short-term debt+long-term debt)/total equity

Upper acceptable limit of the Debt to Equity is usually 2:1
A Ratio greater than 1 means assets are mainly financed with debt.
A Ratio less than 1 means equity provider a majority of the financing.
If the ratio is high then the company is in a risky position,Especially if interest rates are on the rise.

Interest Coverage:The times interest earned ratio indicates how well the firms earnings can cover the interest payments on its debt. This ratio is also known as the interest coverage.

Interest coverage= EBIT/Interest chanrges

EBIT=Earnings Before Interest and Taxes.


DeEpAK KaRtHiK (420) said...

Informative !
keep sharing :)

chirag said...

nice information thanks

worldknowledge said...

Thank you ..keep visiting.

saikat mbka ghosh said...

thnx you for sharing , quite informative...

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