Problem: Mr. Parks has asked you to advise him on the long-term debt-paying ability of Arodex Company. He provides you with the following ratios:
2007 2006 2005
Times interest earned: 8.2 6.0 5.5
Debt ratio: 40% 39% 40%
Debt to tangible net worth: 80% 81% 81%
a) Give the implications and the limitations of each item separately and then the collective influence that could be drawn from them about Arodex Company's long-term debt position.
b) What warnings should you offer Mr. Parks about the limitations of ratio analysis for the purpose stated here?