Strategic Management: Formulation and Implementation

Debt Ratio

The debt ratio is computed by simply dividing the total debt of the firm (including current liabilities) by its total assets:

Debt ratio = Total liabilities
Total assets

The debt ratio for Jimco in 1993 is:

$10,000,000 + $10,700,000 = .668, or 66.8%
$31,000,000

industry average = 54.9%

The higher this ratio, the more financial leverage a firm has.

Long-term Debt To Total Capitalization

This ratio indicates the relationship between the long term funds provided by creditors and those provided by the firm's owners.

Long-term debt ratio = Long-term debt
Long-term debt + preferred shares + capitalization

The debt-equity ratio for Jimco in 1993 is

$10,700,000 = .505, or 50.9%
$10,700,000 + 10,300,000

industry average = 33.41%

Therefore, Jimco has obtained a little more than half its permanent financing from debt sources.