Chapter 15: Q10RQ (page 835)

Briefly describe the ratios that can be used to evaluate a company’s ability to pay long-term debt.

Expert verified

Debt ratio,

Debt to Equity ratio,

Times Interest Earned ratio etc.

Step by step solution

The ratio describes the link between the two things and shows the relation and effect of one on another.

Thedebt ratioshows the relation between the company's assets and debts and indicates how much of the assets are financed by the debt.

Formula:

$Debt ratio = \frac{Total Liabilities}{Total Assets}$

2. Debt equityratioshows the relation between the amounts and how much of the capital employed is divided among the company's owners or creditors.

Formula;

$Debt - Equity ratio = \frac{Total Liabilities}{Total equity}$

3. Thetimes-Interest-Earned ratioindicates the business's ability to pay interest expenses or debt obligations.

Formula:

$Times interest earned ratio = \frac{Earnings before interest and tax}{Interest expense}$

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1..Includes the income statement, balance sheet, statement of stockholders’ equity, and statement of cash flows	a. Notes to financial statements
2. Attests to the fairness of the presentation of the financial statements.	b. Report of independent registered public accounting firm
3. Includes a summary of significant accounting policies and explanations of specific items on the financial statements.	c. Management’s discussion and analysis of financial condition and results of operations (MD&A)
4. Is written by the company to help investors understand the results of operations and the financial condition of the company.	d. Financial statements

XYZ ATHLETIC SUPPLY, INC.
Five-Year Financial Summary (Partial; adapted)
(Dollar amounts in thousands except per share data)	2018	2017	2016	2015	2014	2016
Net sales revenue	\(275,000	\)222,000	\(199,000	\)171,000	131,000
Net Sales Revenue Increase	24%	12%	16%	31%	17%
Domestic Comparative Store Sales Increase	6%	6%	5%	8%	10%
Other Income—Net	2,090	1,780	1,770	1,700	1,310
Cost of Goods Sold	208,725	169,386	154,822	134,235	103,883
Selling and Administrative Expenses	41,280	36,340	31,670	27,450	22,540
Interest:
Interest Expense	(1,070)	(1,370)	(1,330)	(1,100)	(800)
Interest Income	140	155	150	230	140
Income Tax Expense	4,420	3,900	3,610	3,390	2,730
Net Income	21,735	12,939	9,488	6,755	2,497
Per Share of Common Stock:
Net Income	1.10	0.80	0.70	0.50	0.28
Dividends	0.45	0.43	0.39	0.35	0.31
Financial Position
Current Assets, Excluding Merchandise Inventory	\(30,900	\)27,200	\(26,800	\)24,400	$21,800
Merchandise Inventory	24,700	22,400	21,600	19,300	17,000	16,800
Property, Plant, and Equipment, Net	51,600	46,200	40,500	35,000	25,200
Total Assets	107,200	95,800	88,900	78,700	64,000
Current Liabilities	32,600	27,800	28,800	25,600	17,000
Long-term Debt	23,000	21,200	16,800	18,600	12,900
Stockholders’ Equity	51,600	46,800	43,300	35,500	34,100
Financial Ratios
Acid-Test Ratio	0.9	1.0	0.9	1.0	1.3
Rate of Return on Total Assets	22.5%	15.5%	12.8%	10.9%	9.9%
Rate of Return on Common Stockholders’ Equity	44.2%	28.7%	24.1%	19.4%	18.9%