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Ratios of Debt Management: Study Sheet

College-Cram.com:: Finance:: Ratios of Debt Management:: Study Sheet

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Description: Learn about Debt Ratio, Debt to Equity Ratio, EBITDA Coverage Ratio, Equity Multiplier, and TIE Ratio with this printable Smartacus Study Sheet.

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Definitions
Debt Ratio
Debt to Equity Ratio
EBITDA Coverage
Equity Multiplier
TIE Ratio
Resources

Definitions

An Asset is any 'thing' a business can own. Buildings, equipment, and vehicles are examples of assets that can be depreciated, while cash, bonds, and inventories are assets that are not depreciated.
Amortization is essentially depreciation for intangible assets (like oil wells, goodwill, etc.)
Depreciation is the reduction in value of an asset over the course of its useful life. It can be calculated in several ways.
EBIT is an abbreviation for "earnings before interest and taxes." It is found by adding back interest and taxes to net income.
EBITDA is an abbreviation for "earnings before interest, taxes, depreciation, and amortization." It is found by addding back interest, taxes, depreciation, and amortization to net income.
Equity is the residual value of ownership shown on the balance sheet. It will always equal "Total Assets" less "Total Liabilities."
Interest is the expense of borrowing money. It can be found on the expense section of the income statement as "Interest."
Liquidity is a company's ability to meet current obligations using liquid assets.
Total Assets is the sum of current assets (like cash), fixed assets (such as buildings), and other assets (i.e., goodwill). It can be found on the balance sheet as "Total Assets."
Total Debt is the combined amount of current liabilities and long-term liabilities. It can be found on the balance sheet as "Total Liabilities."

EBITDA Coverage

The EBITDA Coverage Ratio shows if earnings are able to satisfy all financing obligations, including leases and principle payments.
Given the EBITDA and lease paid from the Income Statement and the interest and principle paid from the Statement of Cash Flow:
EBITDA Coverage = (EBITDA + Lease Paid) / (Interest + Principle Paid + Lease Paid)
Generally, the higher the ratio, the more secure the lender's position. A ratio less than 1.0 indicates an inability to meet financial obligations out of operating cash flow.

TIE Ratio

The Times Interest Earned Ratio shows the ability to service interest payments from earnings. This ratio focuses more narrowly than the EBITDA Coverage Ratio which considers other obligations than interest which must also be paid from earnings.
Given the Earnings Before Interest and Taxes (EBIT) and Interest from the Income Statement:
The Times Interest Earned Ratio = EBIT / Interest
Generally, the higher the ratio, the more easily interest obligations can be met out of earnings. A ratio of less than 1.0 means earnings are insufficient to meet the interest payments.