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Home : Financial Ratios

AllChem Industries Financial Ratios

Total Debt to Equity
  This is a ratio that reveals the extent of debt within a company's capital structure and the company's ability to pay the debt.  It is computed by dividing total liabilities by the total of stockholder's equity as illustrated in the following formula:

Total debt


Total stockholder equity


Generally, debt to equity ratios above 6:1 require a careful examination of whether the company is capable of continuing its ongoing operations given its current capital structure.  However, certain industries have capital structures that are more debt intensive.  Therefore, should your company's debt to equity ratio exceed the 6:1 guideline, please feel free to contact our finance manager to discuss the special circumstance that apply.



Current Ratio
This ratio is used to measure the ability of an enterprise to meet its current liabilities out of its current assets.  Because it shows the margin of safety available to cover any possible shrinkage in the value of current assets, it is an indicator of liquidity.   The ratio is calculated by dividing current assets by current liabilities as illustrated in the following formula:


Current assets


Current liabilities



As sharp decline in the ratio indicates a deterioration in a company's liquidity, which may mean that the company will be unable to meet its current debt when that debt is due.  Liquidity means the readiness and speed with which current assets can be converted into cash.


A company whose current ratio is less than one is financing its current liabilities with long-term assets.  This capital structure is a strong indicator that company may not be able to make timely payment on its current liabilities such as trade accounts payable.



Coverage Ratio

The interest coverage ratio reflects the number of times interest expense is covered by earnings or cash flow.  The ratio reveals the magnitude of the decline in income that a firm can tolerate and still be able to meet its interest payment.  The ratio is computed by dividing income before taxes and interest by its interest expense as is illustrated in the following formula:



Income before taxes & interest expense


Interest expense



As trade accounts payable are generally unsecured, an unsecured creditor must examine a debtor's ability to make payment to its secured creditors.  If the debtor firm is unable to, or has difficulty in, making payment to its secured creditors, it is highly likely that the trade credit extended to it by others will either not be repaid at all, or repaid much slower than originally agreed to.



A firm must be able to generate a profit to remain in business.  Although short-term profitability by itself is not indicative of a firm's creditworthiness, firms experiencing recent losses need to be analyzed more close to examine whether the loss is the result of a one time occurrence or whether it is indicative or large more fundamental problems that threaten the long term solvency of the firm.  A firm which is losing money and continuing in operations must have a way to finance the losses - either through additional equity infusions by its owners, trade or third party financing.  Since third party debt is usually secured, an unsecured debtor, such as a company extending trade credit must examine a firm's ability to generate a profit on its operations in order to determine whether any trade credit extended by the creditor will be repaid.


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