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|
The debt ratio for Jimco in 1993 is:
|$10,000,000 + $10,700,000||= .668, or 66.8%|
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.