Debt ratios help investors analyze a company's ability to pay the principal and interest on its outstanding debt, how it finances its asset purchases, and its ability to withstand economic turbulence. By evaluating a company's debt ratios, you can determine if it is using debt responsibly to grow its business, or if it is relying excessively on debt to meet core obligations and thus could have trouble looming in the near future.

Certain debt ratios should be compared to certain benchmarks, while others are more subjective, meaning you should compare your target company's figures to its industry peers and to the broader market. For a large-cap retailer such as Wal-Mart Stores Inc. (NYSE: WMT), the most reliable debt ratios to evaluate are the debt-to-equity ratio, interest coverage ratio and cash flow-to-debt ratio.

Debt-to-Equity Ratio

The debt-to-equity (D/E) ratio compares the percentage of a company's assets financed by debt to the percentage financed by equity. A high D/E ratio suggests a company is more leveraged, meaning it relies more on debt to finance asset purchases. While using leverage is not an inherently bad thing, using too much can put a company in a precarious position.

Wal-Mart's D/E ratio for the third quarter of 2015 was 0.56. This is a healthy figure that has remained remarkably steady over the past decade. It indicates the company is using almost twice as much equity as debt to finance asset purchases, and its debt management practices have not wavered, even during an economically turbulent period. Among its two primary competitors, Target has a higher D/E ratio at 0.9, while Costco's D/E ratio is slightly lower at 0.45.

Interest Coverage Ratio

The interest coverage ratio measures how many times a company can pay the interest on its outstanding debt with its current earnings. A high ratio means a company is not likely to default on debt obligations in the near future. Most analysts agree the absolute lowest acceptable interest coverage ratio is 1.5, though value investors prefer companies with a significantly higher number.

Wal-Mart's interest coverage ratio for the 12-month period ending in October 2015 is 9.79. With its current earnings, the company could pay the interest on its outstanding debt almost 10 times over. This figure has experienced a recent dip, though it is still at a healthy level. However, Costco has a much greater interest coverage ratio at 28.38. Target has no interest coverage ratio, since its trailing 12-months earnings are negative.

Cash Flow-to-Debt Ratio

The cash flow-to-debt ratio measures the percentage of a company's total debt it can pay with its current cash flow. This is an effective metric to consider along with the interest coverage ratio because it includes only earnings that have actually materialized in cash.

Wal-Mart's cash flow-to-debt ratio as of October 2015 is 0.22, meaning its current cash flow could pay 22% of its debt. Many analysts consider a double-digit percentage to be a healthy sign, and this ratio is further proof of Wal-Mart's responsible debt management. Target also has a 0.22 cash flow-to-debt ratio, while Costco's is a lower 0.16. Wal-Mart's cash flow-to-debt ratio has inched upward over the past decade, a trend that should give investors confidence in the company's continued financial health.

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