Homework SourseMr Reid has asked you to advise him of the longterm debt pos
Mr. Reid has asked you to advise him of the long-term debt position of the Locksmith Corporation.
He provides you with the ratios indicated below.
Required:
Give the implications and limitations of each item separate and then the collective inference one may draw about the Locksmith Corporation\'s long-term debt-paying ability.
| 2004 | 2005 | 2006 | |
| Fixed Charge Coverage | 6.2 | 4.4 | 4.9 |
| Times Interest Earned | 8.1 | 5.9 | 5.2 |
| Debt Ratio | 39% | 38% | 39% |
| Debt to Tangible Net Worth | 79% | 80% | 83% |
Solution
Answers
a)
1)Times Interest Earned
The Implications of Time Interest Earned Ratio.
The Times Interest Earned ratio measures the company’s ability to pay off its interest expense from the current year earnings i.e Earning before interest and tax.
The Times Interest Earned = Earnings before interest and Tax/Interest Expenses
The Times Interest Earned Ratio has increased year on year it implies that the company has sufficient earnings to meet current obligations.
The Limitation of Times Interest Earned Ratio
1) It does not consider fixed financial payments other than interest.
| a) |
| 1)Times Interest Earned |
| The Implications of Time Interest Earned Ratio. |
| The Times Interest Earned ratio measures the company’s ability to pay off its interest expense from the current year earnings i.e Earning before interest and tax. |
| The Times Interest Earned = Earnings before interest and Tax/Interest Expenses |
| The Times Interest Earned Ratio has increased year on year it implies that the company has sufficient earnings to meet current obligations. |
| The Limitation of Times Interest Earned Ratio |
| 1) It does not consider fixed financial payments other than interest. |
