Long Term Debt Total Funds Ratio

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Long-Term Debt-Total Funds Ratio

This ratio is an extension of debt-equity ratio and provides similar information as the debt-equity ratio. In this ratio, the long-terms debts are related to total capital of the firm and not merely to the shareholders funds. The total capital or capital employed consists of shareholders funds and the long-term debts (loan capital). It is computed as:

Long-term Debt to Total capital Ratio = Long-term Debts / Shareholder’s Funds + Long-term Debts

Another approach for calculating the debt to total funds (total capital or capital employed) is to relate the total debts to the total assets of the firm. Total debt comprises long-term debts plus current liabilities. The total assets consist of permanent capital and current liabilities
Example: The following information is available from the accounts books of a company: Equity share capital Rs. 5,00,000; preference share capital Rs. 1,00,000; Securities Premium Account Rs. 50,000; General Resource Rs. 3,50,000; Preliminary Expenses Rs. 50,000; Profit and Loss Appropriation Account Rs. 4,10,000; 14% Debentures- Rs 6,30,000. Calculate Long term debt to total funds ratio

=   Long-term debts / Total Funds  = 6,30,000 / 19,90,000

Interest Coverage Ratio

This ratio, also known as "Time-interest-earned ratio", establishes a relationship between profit before interest on long-term debts and taxes and the interest on long-term debts. It is generally expressed as 'number of times'. It is calculated as:

                                                 Profit before charging interest on

Interest Coverage Ratio = long-term debts and income tax / Interest on long term Debts.

The objective of this ratio is to measure the debt servicing capacity of a business firm in respect of fixed interest on the long-term debts, e.g., debentures, bonds, mortgage loans etc. It shows whether the firm has sufficient income to pay interest on maturity dates. Components. The two components of this ratio are: (i) Profit before interest on long-term debts and tax and  (ii) interest on long-term debts. This ratio uses the consent of net profit before’ tax because tax is calculated after deducting interest on long-term loans.

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