Leverage or gearing ratios, Financial Accounting

Leverage or Gearing Ratios - These ratios include the Long Term Debt to Equity Ratio, Total Debt to Equity Ratio, Interest Coverage Ratio. Here, the interest coverage ratio is also called "number of times interest earned". It also includes Equity ratio i.e. Owner's equity to Total Assets. These ratios show the degree of leverage employed by a particular firm in the sense that how much of the total business of a firm is financed by equity, debt etc.

 

Ø  Long Term Debt to Equity Ratio = Long Term Debt / Total Equity

Ø  Total Debt to Equity Ratio = Total Debt / Total Equity

Ø  Interest Coverage Ratio = Earnings before Interest and Taxes (EBIT) / Interest Expense

Ø  Equity Ratio = Owner's Equity to Total Assets

Ø  Fixed Assets to Long term liabilities = Net Fixed Assets to Long Term Liabilities.

Ø  Owner's Equity to Total Liabilities

The Debt to Equity ratios shows the proportion of Debt to the Total Equity in the Company. Interest Coverage Ratio shows the interest paying capability of the company. The higher the ratio, the better is the capability of the company to pay interest on debt outstanding. The higher the equity ratio the lower is the gearing for a firm i.e. to say that the debt is low for that firm and hence the firm has a better position due to fewer obligations. The ratio "Fixed Assets to Long term liabilities", the higher it is the better, because it actually shows how safe are long term creditors in the sense that fixed assets are funded through long term liabilities only.

Tags: The various groups of financial ratios on the grounds of informational homogeneity

Posted Date: 7/26/2012 5:49:27 AM | Location : United States







Related Discussions:- Leverage or gearing ratios, Assignment Help, Ask Question on Leverage or gearing ratios, Get Answer, Expert's Help, Leverage or gearing ratios Discussions

Write discussion on Leverage or gearing ratios
Your posts are moderated
Related Questions
Investment Tax Credit - This is a component of general business credit and comprises the following: 1. Energy credit 2. Rehabilitation credit 3. Reforestation credit

Using the profitability index, which of the following projects should be accepted? Project M:  NPV = $60,000     NINV =    $200,000 Project N:  NPV = $10,000     NINV =     $

The basic EOQ model is depends on the subsequent assumption: 1) The forecast usage or demand for a specified period, usually one year, is identified 2) The usage/demand is ev

State the users of accounting information Environment has brought new challenges for managers and other users of accounting information. Their requirements have changed and bot

RETAINED PROFITS BROUGHT FORWARD If we recall from the consolidated balance sheet, the group-retained profits should be made up of the holding companies retained profit plus the

Given the information that follows, draw a cash budget for the XYZ Store for the first six months of 2012. Every prices and costs remain constant. Sales are 80% for credit

Simon Corporation's bonds have 12 years left over to maturity. Interest is paid yearly, the bonds have a $1,000 par value, and the coupon interest rate is 11.5%. The bonds have a y

Explain the meaning of the terms "tangible" and "intangible" and discuss how these terms are used in describing assets.

Potential sources of finance for very new businesses Initial owner finance is almost always the first source of finance for a business, whether from the owner or from family co

I have this assignment. Is there a cost associated for help?