Leverage or Gearing Ratios: Such ratios comprise the Long Term Debt to Equity Ratio, Total Debt to Equity Ratio, Interest Coverage Ratio. Here, the interest coverage ratio is also termed “number of times interest earned”. It too includes Equity ratio that is, Owner’s equity to Total Assets. Such ratios show the degree of leverage employed by a specific firm in the sense that how much of total business of a firm is financed by the equity, debt and so on.
• Long Term Debt to Equity Ratio = Long Term Debt/Total Equity
• Total Debt to Equity Ratio = Total Debt/Total Equity
• Interest Coverage Ratio = Earnings before Interest and Taxes (EBIT)/Interest Expense
• Equity Ratio = Owner’s Equity to Total Assets
• Fixed Assets to Long term liabilities = Net Fixed Assets to Long Term Liabilities.
• Owner’s Equity to Total Liabilities
The Debt to Equity ratios exhibits the proportion of Debt to the Total Equity in the Company. Interest Coverage Ratio shows the interest paying capability of company. The higher the ratio, the superior 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 that is to say that the debt is low for that firm and therefore the firm has a better position due to fewer obligations. The ratio “Fixed Assets to long term liabilities”, the higher it is the better, since it actually shows how safe are long term creditors in the sense that fixed assets are funded via long term liabilities only.