investors can get a clear picture of how the use of leverage impacts a company’s profitability. Financial analysts consider the ROCE measurement to be a more comprehensive profitability indicator because it gauges management’s ability to generate earnings from a company’s total pool of capital. Debt Ratios These ratios give users a general idea of the company’s overall debt load as well as its mix of equity and debt. Debt ratios can be used to determine the overall level of financial risk a company and its shareholders face. In general, the greater the amount of debt held by a company the greater the financial risk of bankruptcy. The ratios covered in this section include the debt ratio, which is gives a general idea of a company’s financial leverage as does the debt-to-equity ratio. The capitalization ratio details the mix of debt and equity while the interest coverage ratio and the cash flow to debt ratio show how well a company can meet its obligations. Debt-Equity Ratio The debt-equity ratio is another leverage ratio that compares a company’s total liabilities to its total shareholders’ equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed. To a large degree, the debt-equity ratio provides another vantage point on a company’s leverage position, in this case, comparing total liabilities to shareholders’ equity, as opposed to total assets in the debt ratio. Similar to the debt ratio, a lower the percentage means that a company is using less leverage and has a stronger equity position. Capitalization Ratio The capitalization ratio measures the debt component of a company’s capital structure, or capitalization (i.e., the sum of long-term debt liabilities and shareholders’ equity) to support a company’s operations and growth. Long-term debt is divided by the sum of long-term debt and shareholders’ equity. This ratio is considered to be one of the more meaningful of the ratios it delivers the key insight into a company’s use of “debt” – leverage. There is no right amount of debt. Leverage varies according to industries, a
investors can get a clear picture of how the use of leverage impacts a company’s profitability. Financial analysts consider the ROCE measurement to be a more comprehensive profitability indicator because it gauges management’s ability to generate earnings from a company’s total pool of capital. Debt Ratios These ratios give users a general idea of the company’s overall debt load as well as its mix of equity and debt. Debt ratios can be used to determine the overall level of financial risk a company and its shareholders face. In general, the greater the amount of debt held by a company the greater the financial risk of bankruptcy. The ratios covered in this section include the debt ratio, which is gives a general idea of a company’s financial leverage as does the debt-to-equity ratio. The capitalization ratio details the mix of debt and equity while the interest coverage ratio and the cash flow to debt ratio show how well a company can meet its obligations. Debt-Equity Ratio The debt-equity ratio is another leverage ratio that compares a company’s total liabilities to its total shareholders’ equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed. To a large degree, the debt-equity ratio provides another vantage point on a company’s leverage position, in this case, comparing total liabilities to shareholders’ equity, as opposed to total assets in the debt ratio. Similar to the debt ratio, a lower the percentage means that a company is using less leverage and has a stronger equity position. Capitalization Ratio The capitalization ratio measures the debt component of a company’s capital structure, or capitalization (i.e., the sum of long-term debt liabilities and shareholders’ equity) to support a company’s operations and growth. Long-term debt is divided by the sum of long-term debt and shareholders’ equity. This ratio is considered to be one of the more meaningful of the “debt” ratios – it delivers the key insight into a company’s use of leverage. There is no right amount of debt. Leverage varies according to industries, a
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