Debt Management Ratios
A. Definition and Formula
1. Debt to capital ratio
- Measures the proportion of debt a company uses to finance its operations as
compared with its capital.
- Formula: Debt to Capital ratio = Total debt/ Total capital
2. Times interest earned ratio
- Measures the ability of the company to use the profits earned from the business to
pay interest on the loans it has borrowed
- Formula: Times interest earned ratio = EBIT/Interest Expense
B/ Analysis
Debt to capital ratio
Industry NET LIX
average: 2022 2023 2022 2023
38.84%
Calculate (424,693/758,947) (459,520/893,814)* (384,068/1,23 (423,701/1,306,03
*100%=55.96% 100%=51.41% 2,208)*100% 7)*100%=32.44%
=31.17%
Meaning 55.96% of debt 51.41% of debt 31.17% of 32.44% of debt
that company that company debt that company
uses to finance its uses to finance its that company uses to finance its
operations as operations as uses to operations as
compared with its compared with its finance its compared with its
capital. capital. operations as capital.
compared
with its
capital.
Comment and Comparison:
- NET group stands out with a ratio well under average both years, suggesting
conservative financial policies.
-Lix group slightly increases the ratio in 2023, a strong sign of debt growth.
Recommendation:
-Continue prioritizing debt reduction efforts as seen by the decline in ratio from
55.96% to 51.41% from 2022-2023.
- Set a goal to drop below the industry average of 50% within the next 2 years to
significantly strengthen the balance sheet.
- Consider evaluating financing alternatives such as equity issues that could
expedite paying down borrowings.
Times interest earned ratio
NET LIX
2022 2023 2022 2023
Calculate (101,716.3+ (204921.2+925 (262786.8+38 (246043.1+384
1658.3)/ 8.002)/ 49.99)/ 9.99)/
1658.3=62.3 9258.002=23.1 3849.99=69.2 3849.99=64.91
4X 3X 6X X
Meaning This This This This company’s
company’s company’s company’s income is 64.91
income is income is income is times higher
62.34 23.13 times 69.26 times than its interest
times higher higher than its higher than expense for the
than interest its year.
its interest expense for interest
expense for the year. expense for
the the year.
year.
Comment and Comparison:
- NET's coverage dropped sharply in 2023, warranting closer monitoring of
profitability and obligations.
- LIX coverage eases slightly in 2023, warranting closer scrutiny of returns,
maintaining solvency.
Recommendation:
- Closely monitor factors driving the decline in interest coverage from 62.34x to
23.13x year over-year.
- Reinforce profitability and cash flow generation capabilities to maintain a healthy
coverage cushion of above 60x for security.
- Limit additional debt increases that heighten financing costs and risks to earnings
sustainability.
