Question

1. Indicate whether the ratios are favorable/unfavorable in comparison to the Industry Average and explain the trend of the two ratios below.
2. Analyze the implication of high Times interest earned ratio.
3. Write down the implication of having a low Debt to Total Asset Ratio. (1.5 marks)

	2015	2016	Industry Average
Debt to Total Assets	10 %	40%	50 %
Times interest earned	9	7	5

Answer 1

(1) DEBT TO ASSET RATIO :

It implies how much amount of assets is financed by using the total debt of the company.

The more the ratio, leverage is high and also risk is high in order to invest in the company.

In the given date when compared to industry debt to asset ratio (50%), the company's debt to asset ratio is less through which we can say that company is in favorable position holding 10% in 2015 and 40 % in 2016.

(2) TIMES INTEREST EARNED:

It is also known as interest coverage ratio. This ratio helps in knowing whether a company will be able to pay off interest with its income before interest and taxes.

The higher the ratio, the less risk for investors and creditors in terms of solvency.

In the given question when compared to industry, company has high interest coverage ratio which is a favorable position holding 9 and 7 times in 2015 and 2016 respectively.

Implication of high interest coverage ratio as already covered above is good for the company as it indicates less risk for investors and creditors in terms of solvency.

Total Debt to Assets ratio being low is good for the company because less debt will be used to finance assets and it will less risk for the company if it has less amount of debt and its obligation to pay interest will also be less.

Which in turn helps in increasing profitability of the business.