To determine whether a company is using leverage effectively, an analyst should consider
A) the current ratio and net working capital.
B) inventory, accounts receivable and total asset turnover ratios.
C) the debt to equity and times interest earned ratios.
D) ROA and the net profit margin.

Question

Quizplus · Accepted Answer

The debt to equity and times interest earned ratios are key indicators of how effectively a company is using leverage. The debt to equity ratio measures the company's financial leverage by comparing its total liabilities to its shareholders' equity, indicating how much debt is used to finance the company's assets relative to equity. The times interest earned ratio, also known as the interest coverage ratio, assesses a company's ability to meet its interest payments, which is crucial for understanding the sustainability of its debt levels. Both ratios directly relate to a company's use of debt and its ability to manage and service that debt, making them relevant for analyzing leverage effectiveness.

To Determine Whether a Company Is Using Leverage Effectively, an Analyst