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Math Help - Please help me.. is this a good thing or a bad thing for a company?

  1. #1
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    Please help me.. is this a good thing or a bad thing for a company?

    hello..
    what does this mean?
    a company's debt ratio is identical to that of the industry standard. Also, the debt equity ratio is identical to that of the industry, but the company';s Times Interest Earned ratio is slightly lower when compared with the industry standards.. what does this mean?how is the company doing when it comes to debt? thanks.
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  2. #2
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    The debt/equity ratio is a balance sheet measure, but doesn't say anything about how much money a company is making, which is an Income Statement question. The Times Interest Earned ratio is important because it addresses the Income Statement.

    Say that a company has $10 million of debt at a 10% annual interest rate. Even if the company had $10 million of equity, or a debt/equity ratio of 1, which is generally looked at as favorable - but the company only earns $500,000 per year, then it wouldn't be making enough money to cover its annual interest cost.

    So, in your example, if two companies have similar balance sheet profiles (debt ratios, etc) but one earns 5 times its interest cost and the other only earns 1 or 2x interest, then the one that earns more is in a better financial position.

    Hope this helps.

    Rick Brenner
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