Debt Management Ratios

Debt Management Ratio is a computation that is a computation that is used to measure a company’s ability to pay its long term debt obligations

•Payables Turnover
•Age of Payables
•Debt to Assets  
•Debt to Equity
•Times Interest Earned

Payables Turnover

•Represents the number of times a company can pays its accounts payable during a period.

Company A

COGS = $1,000,000
Accounts Payable = $506,000

Payables Turnover =     $1,000,000   
          $506,000

Payables Turnover = 1.97 times

Age of Payables

•Age of payables measures the average number of days spent before paying obligations to suppliers.


Age of Payables = 365
                1.97

Age of Payables = 185 days


Debt to Asset Ratio

•The long term solvency and the capital structure of a country is being judged by Debt to Asset Ratio.
•It shows the percentage of debt in comparison to the assets of a company i.e. examines how many assets of a company are financed by debt.
Debt to assets ratio =  Total Debt (or Liabilities)     
                                          Total Assets

Total Assets = $3,373
Current Liabilities = $543
Long Term Debts = $531

Debt to Assets = $543 + $531
                                $3,373
Debt to Assets = 31.84%


Debt to Equity Ratio

•Debt to Equity ratio measures the long term solvency and the capital structure of a company.
•It helps in figuring out the percentage of debt and equity in the balance sheet of a firm.
•A greater percentage of shareholders equity shows excess of finance which safeguards the company’s leverage.
•Debt to Equity Ratio = Total Debt (or Liabilities)
                                            Total Equity

Total Equity = $2,299

Current Liabilities = $543
Long Term Debts = $531

Debt to Equity = $543 + $531
                                $2,299

Debt to Equity = 46.72%


Times Interest Earned

Times Interest Earned Ratio = Earnings before Interest and Taxes
                                                            Interest Expense

•EBIT is found on the Income Statement as the net Operating Profit before subtracting interest expense and taxes.
•Measuring the ratio of the Operating Profit available to service debt.
The higher the number the greater the safety margin and the lower the risk a company can pay it’s debts.

•EBIT = $691
Interest Expense = $141

TIE = $691
          $141

TIE = 4.9 times


Last modified: Tuesday, August 14, 2018, 8:39 AM