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6 May, 2015 - 17:10

The following methods are commonly used to evaluate the safety of long-term creditors:

  1. ratio of shareholders' equity to liabilities (debt-to-equity),
  2. ratio of plant assets to long-term liabilities,
  3. operating income divided by interest expense, as well as other payments (known as times-interest-earned or coverage ratios).

For all these methods of analysis, the higher the number, the greater the amount of safety. This information is used by investors, creditors, shareholders and management. It indicates the ability of a firm to meet its financial obligations.