RATIO ANALYSIS.Debt RatioActivity 6· Understand the information provided by the debt ratio.· Identify the expected range and whether an increasing or decreasing trend is preferred.Purpose:The debt ratio compares total liabilities to total assets. This ratio measures the proportion of assets financedby debt. It is a measure of long-term solvency.Total liabilitiesDEBT RATI0 =Total assetsJOHNSON &CITIGROUP12/31/99HEWLETT-PACKARD10/3 1/99JOHNSON1/03/99WAL-MART1/31/99($ in 000s)Assets$716,937,000$35,297,000$26,211,000$49,996,000Liabilities667,251,00017,002,00012,621.00028,884,000Stockholders'Equity$ 49,686,000$18,295,000$13,590,000$21,112,000Source: Disclosure, Inc, Compact D/SEC, 2000.1. For each-company listed above, compute the debt ratio. Record your results below.Debt ratio:0.932. The debt ratios computed above are primarily in the ranġe (less than 0,40 / 0.40 through 0.70 / over 0.70):3.% of Wal-Mart's assets are financed by debt.4. (Citigroup /Hewlett-Packard/ Johnson & Johnson / Wal-Mart) are relying more on debt to financeassets and have a debt ratio (greater / less) than 0.50,5. Assume that the debt ratio indicates the degree of financial risk. (Citigroup / Hewlett-Packard / Johnson& Johnson / Wal-Mart) is assuming the most financial risk. For a company wanting to be lower risk andless dependent on debt, a(n) (increasing / decreasing) trend in the debt ratio is considered favorable. Acompany that has higher financial risk will, in general, be required to pay (higher / lower) interest rateswhen borrowing money.6. Explain why a company with a greater debt ratio tends to be a higher financial risk.7. Does a high debt ratio indicate a weak corporation? (Yes / No) Explain your answer.

Ratio analysis refers to the method of analyzing the financial data of the company using the…

JOHNSON & JOHNSON 1/03/99 HEWLETT- CITIGROUP 12/31/99 PACKARD 10/3 1/99 WAL-MART 1/31/99 ($ in 000s) Assets $716,937,000 $35,297,000 $26,211,000 $49,996,000 Liabilities 667,251,000 :- 17,002,000 - 12,621.000 28,884,000 Stockholders' Equity Source: Disclosure, Inc., Compact D/SEC, 2000. $ 49,686,000 $18,295,000 $13,590,000 $21,112,000 1. For each-company listed above, compute the debt ratio. Record your results below. Debt ratio: 0.93 2. The debt ratios computed above are primarily in the range (less than 0,40 / 0.40 through 0.70 / over 0.70): 3. % of Wal-Marť's assets are financed by debt.

JOHNSON & JOHNSON 1/03/99 HEWLETT- CITIGROUP 12/31/99 PACKARD 10/3 1/99 WAL-MART 1/31/99 ($ in 000s) Assets $716,937,000 $35,297,000 $26,211,000 $49,996,000 Liabilities 667,251,000 :- 17,002,000 - 12,621.000 28,884,000 Stockholders' Equity Source: Disclosure, Inc., Compact D/SEC, 2000. $ 49,686,000 $18,295,000 $13,590,000 $21,112,000 1. For each-company listed above, compute the debt ratio. Record your results below. Debt ratio: 0.93 2. The debt ratios computed above are primarily in the range (less than 0,40 / 0.40 through 0.70 / over 0.70): 3. % of Wal-Marť's assets are financed by debt.

FINANCIAL ACCOUNTING

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ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Question

RATIO ANALYSIS.
Debt Ratio
Activity 6
· Understand the information provided by the debt ratio.
· Identify the expected range and whether an increasing or decreasing trend is preferred.
Purpose:
The debt ratio compares total liabilities to total assets. This ratio measures the proportion of assets financed
by debt. It is a measure of long-term solvency.
Total liabilities
DEBT RATI0 =
Total assets
JOHNSON &
CITIGROUP
12/31/99
HEWLETT-
PACKARD
10/3 1/99
JOHNSON
1/03/99
WAL-MART
1/31/99
($ in 000s)
Assets
$716,937,000
$35,297,000
$26,211,000
$49,996,000
Liabilities
667,251,000
17,002,000
12,621.000
28,884,000
Stockholders'
Equity
$ 49,686,000
$18,295,000
$13,590,000
$21,112,000
Source: Disclosure, Inc, Compact D/SEC, 2000.
1. For each-company listed above, compute the debt ratio. Record your results below.
Debt ratio:
0.93
2. The debt ratios computed above are primarily in the ranġe (less than 0,40 / 0.40 through 0.70 / over 0.70):
3.
% of Wal-Mart's assets are financed by debt.
4. (Citigroup /Hewlett-Packard/ Johnson & Johnson / Wal-Mart) are relying more on debt to finance
assets and have a debt ratio (greater / less) than 0.50,
5. Assume that the debt ratio indicates the degree of financial risk. (Citigroup / Hewlett-Packard / Johnson
& Johnson / Wal-Mart) is assuming the most financial risk. For a company wanting to be lower risk and
less dependent on debt, a(n) (increasing / decreasing) trend in the debt ratio is considered favorable. A
company that has higher financial risk will, in general, be required to pay (higher / lower) interest rates
when borrowing money.
6. Explain why a company with a greater debt ratio tends to be a higher financial risk.
7. Does a high debt ratio indicate a weak corporation? (Yes / No) Explain your answer.

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