Debt

Total Debt to Equity

This debt ratio measures a firm's leverage, and is therefore an estimate of its financial risk. A high-level of debt can be a warning sign of possible problems in the future and indicates high financial risk. A high-level of debt implies high fixed interest costs, which reduces the firm’s financial flexibility and its ability to pay dividends to the common shareholders. A low level of debt can indicate that management is not optimizing the firm’s capital structure and is therefore not maximizing total shareholder wealth. Utility firms, which are typically highly leveraged, should not carry total debt that exceeds 1.5 times its common equity. Industrial concerns, on other hand, should not incur debt that exceeds 0.5 times its equity base.

Total Debt to Assets

This ratio measures the level of support that is provided to the firm by its creditors. The reciprocal of this ratio is called the asset coverage ratio. The asset coverage ratio shows the amount of assets backing the companies debt and is a safety measure from a bondholder’s perspective. This ratio should be calculated using total tangible assets in order to determine a conservative estimate of the firms ability to re-pay a bondholder.

Times Interest Earned