Strategic Management: Formulation and Implementation

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.

Times Interest Earned Ratio

The times interest earned ratio indicates the firm's ability to meet its interest payments out of its annual operating earnings. JImco's ratio is computed as follows:

Times interest earned = net operating income (NOI)or earning before interest and taxes (EBIT)
annual interest expense
$4,000,000 = 4.00 times
$1,000,000

industry average = 7.62 times

This ratio is much lower than the industry norm of 7.62 times. However, it appears that Jimco's earnings could be improved in order to afford the higher use of financial leverage.