Question

What are the 3 Leverage or Debt Management Ratios (will the business be able to service the debt it has undertaken, paying both interest and principa)?

Answer 1

Debt management ratios are used to assess a business's ability to service its debt obligations by paying both interest and principal. The three key ratios are debt to equity ratio, debt to assets ratio, and interest coverage ratio.

Step-by-step explanation:

Debt management ratios are used to assess a business's ability to service its debt obligations by paying both interest and principal. There are three key debt management ratios:

1. Debt to equity ratio: This ratio compares a company's total debt to its total equity, indicating the proportion of debt financing relative to equity financing. A lower ratio indicates a lower dependency on debt and a more favourable position to service debt.
2. Debt to assets ratio: This ratio measures a company's total debt relative to its total assets. It provides insight into the proportion of a company's assets financed by debt. A lower ratio suggests a lower risk and better debt management.
3. Interest coverage ratio: This ratio evaluates a company's ability to pay interest expenses using its earnings before interest and taxes (EBIT). A higher ratio indicates a stronger ability to cover interest payments.