Financial Management: Debt to Equity Ratio, Interest Coverage Ratio, Return on Assets, Return on Equity

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Answer a:
Debt to equity ratio:
The first ratio to be calculated is the debt to equity ratio which is the leverage ratio that helps
in the calculation of the total weight of the total amount of the debt and the total amount of
the financial liabilities as against the equity from the shareholders. Debt to assets ratio is the
ratio that uses the total assets of the company as denominator but this is the ratio that uses the
amount of the shareholders equity as its denominator. This ratio helps in the highlighting of
the capital structure of the company and shows the tilt towards the debt or the equity
financing of the company (Bhandari, 2019).
A higher ratio shows riskiness of the company. Hence, the lower this ratio, the better it is for
the company. This ratio could be seen to have been increasing with the each passing year.
This shows that the company is exposed to risks. Hence, the company must look for the ways
through which the same could be reduced. The debt to equity ratio of the company has
undergone a change due to the reason that both the debt as well as the equity have increased
when compared over the period of 5 years. The company should look for the ways through
which either the debt could be reduced or equity could be increased.
Interest coverage ratio:
This is the ratio which is the financial ratio of the company and it helps in the measurement
of the ability of the company to make the payments for interests on the debt. This ratio shows
if the company would be able to make the timely payments of its debt along with its interest
payments. This is the ratio which is very much different from the debt service coverage ratio
which is the liquidity ratio of the company and this has got nothing to do with the company
making the principal payments on the debt all by itself. This is the ratio that helps in the
calculation of the interest on the debt.

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The creditors and the investors use this calculation for the purposes of understanding the
profitability and the risk that the company is exposed to. In order to illustrate, an investor
would be interested in understanding of his investment would grow in the future or not. An
integral and a major part of the company is associated with the profits and the operational
efficiencies of the company. Hence, the investors would want to know if it is able to pay its
bills on time without the need to think about stopping the operations and the working capital.
(Dothan, 2019).
A higher ratio for the company indicates an increase in the ability of the company to pay off
its debt and the interest on the debt. The calculated ratio shows an improvement from year
2014 to year 2016 but then it shows a downfall. This ratio of the company undergone a
change due to the reason that though the amount of the interest expense has increased with
each passing year but the years have also witnessed a lesser increase in the amount of the
earnings before interest and taxes.
Return on assets:
This is the ratio which shows the profitability position of the company which helps in the
measurement of the net income of the company which has been generated by the total amount
of the asset during the time when the net income is being compared with the average amounts
of the total assets. Since the main motive of the company is the generation of profits, hence
this ratio is of an utmost importance for the company along with for the investors, since they
would want to see their investment increase in value. This could be seen as a return on the
investment for the company since the capital assets are the assets that form the major
investment for the companies (Burton, 2002).
This is the ratio which should be high for the companies since a higher ratio indicates a
higher return on the total amount of the assets that have been employed by the company. The

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calculated ratio shows an increase which is good for the company. But still, this ratio should
be improved further so that the profitability could improve even more for the company. This
ratio has undergone a change due to the fact that though the net income that was being earned
by the company has increased when compared over the period of 5 years but the increase was
no so that it was able to cover the increase in the amount of the assets that were employed
into the business.
Return on equity:
This is the ratio which is again a profitability ratio that helps in the measurement of the
ability of the company to generate profits from the investments of the shareholders in the
company. This is the ratio that shows the amount of the profit on each dollar of the funds of
the shareholders (Arditti, 2019).
This is the ratio which should be high for the companies since a higher ratio indicates a
higher return on the total amount of the assets that have been employed by the company. The
calculated ratio shows an increase which is good for the company. But still, this ratio should
be improved further so that the profitability could improve even more for the company. This
ratio has undergone a change due to the fact that though the net income that was being earned
by the company has increased when compared over the period of 5 years but the increase was
no so that it was able to cover the increase in the amount of the funds that were employed
into the business.
The companies must necessarily takes all the steps that are required to reduce and also
improve the debt to capital ratios. The company could achieve this by the way of increasing
the profitability, by the way of better management of the inventory and also through the
restructuring of the debt. Both the capital structure ratios and the profitability ratios goes
hand in hand and must be used with one another for the purposes of improving them. In case,