Chapter 17, Problem 9E

To determine

Introduction:

Ratio Analysis

• Ratio analysis is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.

• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

The key metrics mentioned above include the following:

• Debt Equity Ratio – A Measure of the total debt used to leverage the business in relation to the percentage of equity.

• A high debt equity ratio indicates a highly leveraged business and can represent increased interest and debt repayment costs.

$\text{Debt Equity Ratio = Debt / Equity}$

• Times Interest earned Ratio – A measure of the total income and the total interest payments made by the business.

• It seeks to measure how much of the earnings can finance interest costs and at what multiple. The higher the ratio, the better.

$\text{Times Interest Earned Ratio = EBIT / Interest Expense}$

To Calculate:

a) Debt and Equity Ratios

b) Debt Equity Ratio

c) Times Interest Earned Ratio