Question

A manufacturing company's financials reveal the following ratios:
Ratio/Calculation	2016	2015	2014	2013	2012	Industry Ave.
Debt Ratio	40.0%	42.0%	46.0%	45.0%	45.0%	52.0%
Times Interest Earned	7.1	7.1	7.1	6.9	6.9	7.1
Fixed Charge Coverage	5.4	5.4	5.9	6.9	6.9	6.5
Financial Leverage Ratio	1.7	1.7	1.9	1.8	1.8	2.1
Based on your review of this company's debt paying ability ratios and their comparison to the industry,
averages comment on this company's debt-paying ability and financial leverage position.

Answer 1

Answer:

Debt-paying ability:

Times Interest Earned: Although in the past company's 'Times Interest Earned' ratio was 6.9, it has improved the same over last 3 years and now it is at par with industry.

Fixed Charge Coverage: The company had 'Fixed Charge Coverage' of 6.9 in 2013 which decreased to 5.4 and is now lower as compared industry average of 6.5. However fixed charge coverage of 5.4 is good enough.

Overall company's shows good debt paying ability.

Financial leverage position

Debt Ratio: Company has debt ratio of 40% as compared industry average of 52%. Gearing ratio is less than the industry average. In terms of risk exposure on this front company is better than the industry.

Financial Leverage Ratio: Company's Financial Leverage Ratio is lower at 1.7 compared to industry average of 2.1. This only confirms company having a healthy debt ratio improving from the past.

Based on debt ratio and financial leverage ratio company is doing better than the industry in managing risk exposure.