Question

Briefly describe the ratios that can be used to evaluate a company’s ability to pay long-term debt.

Short answer

Debt ratio,

Debt to Equity ratio,

Times Interest Earned ratio etc.

Step-by-step solution

Step 1:Meaning of Ratio

The ratio describes the link between the two things and shows the relation and effect of one on another.

Step 2:Explanation of some ratios used by the companies to evaluate their ability to pay long-term debt

1. Thedebt ratioshows the relation between the company's assets and debts and indicates how much of the assets are financed by the debt.

Formula:

$\text{Debt} \text{ratio}=\frac{\text{Total} \text{Liabilities}}{\text{Total} \text{Assets}}$

2. Debt equityratioshows the relation between the amounts and how much of the capital employed is divided among the company's owners or creditors.

Formula;

$\text{Debt - Equity} \text{ratio}=\frac{\text{Total} \text{Liabilities}}{\text{Total} \text{equity}}$

3. Thetimes-Interest-Earned ratioindicates the business's ability to pay interest expenses or debt obligations.

Formula:

$\text{Times} \text{interest} \text{earned} \text{ratio}=\frac{\text{Earnings} \text{before} \text{interest} \text{and} \text{tax}}{\text{Interest} \text{expense}}$