Financial Risk - This is risk related to the company's financial structure.

I. Analysis of a Company's Use of Debt

1. Debt to Total Capital
This measures the proportion of debt used given the total capital structure of the company. A large debt-to-capital ratio indicates that equity holders are making extensive use of debt, making the overall business riskier.

Formula 7.32

Debt to capital = total debt 
                           total capital

Where:
Total debt = current + long-term debt
Total capital = total debt + stockholders' equity

2. Debt to Equity
This ratio is similar to debt to capital.

Formula 7.33

Debt to equity = total debt
                         total equity

II. Analysis of the Interest Coverage Ratio

3. Times Interest Earned (Interest Coverage ratio)
This ratio indicates the degree of protection available to creditors by measuring the extent to which earnings available for interest covers required interest payments.

Formula 7.34

Times interest earned = earnings before interest and tax
                                                interest expense

4. Fixed-Charge Coverage
Fixed charges are defined as contractual committed periodic interest and principal payments on leases and debt.

Formula 7.35

Fixed-charge coverage = earnings before fixed charges and taxes
                                                           fixed charges

5. Times Interest Earned - Cash Basis
Adjusted operating cash flow is defined as cash flow from operations + fixed charges + tax payments.

Formula 7.36

Times interest earned - cash basis = adjusted operating cash flow
                                                                 interest expense

6. Fixed-Charge Coverage Ratio - Cash Basis

Formula 7.37

Fixed charge coverage ratio - cash basis = adjusted operating cash flow
                                                                               fixed charges

7. Capital Expenditure Ratio
Provides information on how much of the cash generated from operations will be left after payment of capital expenditure to service the company's debt. If the ratio is 2, it indicates that the company generates two times what it will need to reinvest in the business to keep operations going; the excess could be allocated to service the debt.

Formula 7.38

Capital expenditure ratio = cash flow from operations
                                                  capital expenditures

8. CFO to Debt
Provides information on how much cash the company generates from operations that could be used to pay off the total debt. Total debt includes all interest-bearing debt, short and long term.

Formula 7.39

CFO to debt = cash flow from operations
                                  total debt



Growth Potential Ratios

Related Articles
  1. Investing

    Analyzing General Electric's Debt Ratios in 2016 (GE)

    Evaluate GE's debt picture using the most important metrics for a large-cap conglomerate, including the debt-to-equity (D/E) ratio and the interest coverage ratio.
  2. Small Business

    Total Debt to Total Assets

    Total Debt to total assets, also called the debt ratio, is an accounting measurement that shows how much of a company’s assets are funded by borrowing. In business, borrowing is also called leverage.
  3. Investing

    How to Calculate a Coverage Ratio

    In broad terms, the higher the coverage ratio, the better the ability of the enterprise to fulfill its obligations to its lenders.
  4. Investing

    Analyzing AT&T's Debt Ratios in 2016 (T)

    Learn about AT&T Inc. and its key debt ratios, such as the debt-to-equity ratio, interest coverage ratio and cash flow-to-debt ratio.
  5. Investing

    Evaluating a Company's Capital Structure

    Learn to use the composition of debt and equity to evaluate balance sheet strength.
  6. Investing

    Calculating Long-Term Debt to Total Assets Ratio

    A company’s long-term debt to total assets ratio shows the percentage of its assets that are financed with long-term debt.
  7. Investing

    Analyzing Wal-Mart's Debt Ratios in 2016 (WMT)

    Analyze Wal-Mart's debt-to-equity ratio, interest coverage ratio and cash flow-to-debt ratio to evaluate the company's financial health and debt management.
  8. Investing

    Target Corp: WACC Analysis (TGT)

    Learn about the importance of capital structure when making investment decisions, and how Target's capital structure compares against the rest of the industry.
  9. Investing

    4 Leverage Ratios Used In Evaluating Energy Firms

    These four leverage ratios can help investors understand how oil and gas firms are managing their debt.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center