Reading: Financing Alternatives

To assess the capital structure of a firm, financial analysts typically use the following four types of ratios:

• Debt ratios: Measure the amount of debt in the firm’s capital structure (market values and book values)
• Leverage ratios: Indicate the relative weights of debt and equity (market values and book values).
• Coverage ratios: Assess to what extent the firm is able to service its debt obligation (interest payments; repayment of notional) with the money it generates from operating activities.
• Equity-to-fixed-assets ratio: Indicate whether the long-term assets of a company are backed with long-term financing.

In what follows, we briefly discuss these ratios. The respective pages are borrowed from the module Financial Analysis for Managers. Please refer to that module for a more comprehensive discussion of how to assess the financial health and performance of a company using the information from its balance sheets and income statements.