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Ratio Analysis
Analysis of Capital Structure Ratios
  General Explanation

The capital structure of a company is composed of debt and equity. Equity capital has no guaranteed rate of return and is the basic risk capital of the company. A small amount of equity capital represents a greater risk to the holder's of debt in the company.

  Capital Structure Ratios  

Equity to total debt

The relationship of stockholder's equity to total liabilities is the most straight-forward measure of a company's solvency. This ratio provides the ratio of stockholder contributed capital to creditor capital.

Equity to
long-term debt

A ratio of less than one in this category indicates a higher reliance on capital provided by creditors than capital provided by owners of the company.

Total debt
to total capital

This ratio provides a measurement of the total creditor demands on the company's assets compared to the owners. Changes over time can reflect the effects of the company's operating results on capital as well as changes created by growth or decline.

Times interest earned

A company's margin over required interest payments is measured directly by the ratio of net income before the interest deduction divided by the annual required interest payment.

Equity to
net fixed assets

The relationship of equity to net fixed assets provides an indirect measure of the margin between the owner's equity and tangible plant, property and equipment.
Financial leverage A company's financial leverage or the ratio of total assets to stock- holder's equity provides an indication of a company's reliance on capital provided by creditors for business operations. A large financial leverage ratio may indicate a situation where the company relies too much on borrowing and long-term solvency is threatened.
Equity growth rate The equity growth rate provides an indication of the change in capital because of the retention of earnings in the company. Years with net retained earnings after dividend payment show an increase in the equity growth rate while years with net losses show a decrease.

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