Question

Tiger Global Management had R6 500 000 in sales last year. The company’s total comprehensive income was R217 000, its total assets turnover was 1,04, and the company’s return on equity (ROE) was 14%. The company is financed entirely with debt and common equity. What is the company’s debt ratio?

Answer 1

Explanation:

To calculate the company's debt ratio, we need to know its total liabilities and total assets. We can use the total assets turnover ratio to calculate the company's total assets:

Total assets turnover = Sales / Total Assets

1.04 = R6,500,000 / Total Assets

Total Assets = R6,500,000 / 1.04 = R6,250,000

Since the company is financed entirely with debt and common equity, its total liabilities are equal to its total debt. We can use the return on equity (ROE) formula to calculate the company's total equity:

ROE = Net Income / Total Equity

0.14 = R217,000 / Total Equity

Total Equity = R217,000 / 0.14 = R1,550,000

Now, we can calculate the company's debt ratio:

Debt Ratio = Total Debt / Total Assets

Debt Ratio = (Total Assets - Total Equity) / Total Assets

Debt Ratio = (R6,250,000 - R1,550,000) / R6,250,000

Debt Ratio = R4,700,000 / R6,250,000

Debt Ratio = 0.752 or 75.2%

Therefore, the company's debt ratio is 75.2%.