Financial Statement Analysis. Learning Objective 4 - Edubirdie

University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

253

Pages:

7
Author:

reockLersedzee

Chapter 14 “How Well Am I Doing?” Financial Statement Analysis 14-66 Learning Objective 4 Compute and interpret financial ratios that would be useful to a long-term creditor. 14-67 Ratio Analysis – The Long–Term Creditor Long-term creditors are concerned with a company’s ability to repay its loans over the long-run. NORTON CORPORATION 2009 Earnings before interest expense and income taxes Interest expense This is also referred to as net operating income. $ 84,000 7,300 Total stockholders' equity 234,390 Total liabilities 112,000 14-68 Times Interest Earned Ratio Times Interest = Earned Times Interest = Earned Earnings before Interest Expense and Income Taxes Interest Expense $84,000 = 11.51 times $7,300 This is the most common measure of a company’s ability to provide protection for its longterm creditors. A ratio of less than 1.0 is inadequate. 14-69 Debt-to-Equity Ratio Debt–to– Total Liabilities Equity = Stockholders’ Equity Ratio This ratio indicates the relative proportions of debt to equity on a company’s balance sheet. Stockholders like a lot of debt if the company can take advantage of positive financial leverage. Creditors prefer less debt and more equity because equity represents a buffer of protection. 14-70 Debt-to-Equity Ratio Debt–to– Total Liabilities Equity = Stockholders’ Equity Ratio Debt–to– Equity = Ratio $112,000 $234,390 = 0.48 14-71 Published Sources That Provide Comparative Ratio Data

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