Debt Ratios Caluculation

Debt Ratios         Debt ratios are calculated to assess that how much a firm is using financial leverage for profit maximization with the combination of total assets. These also reflect that how much the firm has the ability to service debt to make the payments required on a scheduled basis over the life of debt. In debt ratios, coverage ratios also measure the bank’s ability to pay certain fixed charges.                                           Total Liabilities Debt Ratio =                                                                  Total Assets   1. Time Interest Earned Ratio         It is also called the Interest Coverage Ratio, measures the firm’s ability to make contractual interest payments. Greater the ratio means that firm is better position to make fulfill its interest obligations.                                                  Earning Before Interest and Taxes  Time interest Earned Ratio  =                                                                                                                  Interest Amount  Earning before income and taxes includes the total interest income and non-interest income, after deducting non-interest expense during the year(s). Interest amount includes interest payments made on deposits (current, saving, fixed) and investments. 2. Fixed Payment Coverage Ratio         The fixed payment coverage ratio was used to measure the firm’s ability to meet all fixed-payment obligations, such as interest and principal, lease payments, and preferred stock dividends.                          Earning before interest and taxes + Lease payments  FPCR        =                                                                                                                  Interest+ Lease Payment+ (Principal) x (1/1-T)          T      = Tax rate applicable to bank income. (1/1-T)      = The term included to adjust the after tax principal amount of borrowing and lease payments back to before tax equivalent.