CHAPTER SIX
Capital Structure and Solvency Measurements
THIS CHAPTER CONTAINS several measurements that can be used to determine the relationship between a company's debt and equity as well as the comparative proportions of different types of stock. It also addresses a company's ability to remain solvent. Solvency is a key concern in Chapter 4, which describes cash flow measurements. Consequently, the measures in both chapters can be used in combination to form a good overall opinion of a corporation's ability to stay in business.
The measurements discussed in this chapter are:
| Times Interest Earned Cash Coverage Ratio Debt Coverage Ratio Asset Quality Index Accruals to Assets Ratio Times Preferred Dividend Earned | Debt to Equity Ratio Funded Capital Ratio Retained Earnings to Stockholders' Equity Preferred Stock to Total Stockholders' Equity Issued Shares to Authorized Shares |
TIMES INTEREST EARNED
Description: An investor or lender should be interested in a company's ability to pay its debts. The times interest earned ratio reveals the amount of excess funding that a company still has available after it has paid off its interest expense. If this ratio is close to one, then the company runs a high risk of defaulting on its debt, whereas any higher ratio shows that it is operating with a comfortable amount of extra cash flow that can cushion it if its business falters.
Formula: Divide the average interest expense by the average cash flow. Cash flow is a company's net income, ...
