The following selected data come from Celebration Company's balance sheets over three recent years. Based on the data, what is Celebration's debt ratio for each of the three years, and do the ratios show deterioration or improvement in Celebration's leverage? Assume that the industry average is 0.30 or 30%.

A) 2.12; 2.17; 2.22; strong but deteriorating slightly
B) 0.39; 0.40; 0.41; weak but improving slightly
C) 2.56; 2.53; 2.46; strong and improving slightly
D) 0.47; 0.46; 0.45; weak and deteriorating slightly

Question

The following selected data come from Celebration Company's balance sheets over three recent years. Based on the data, what is Celebration's debt ratio for each of the three years, and do the ratios show deterioration or improvement in Celebration's leverage? Assume that the industry average is 0.30 or 30%.

A) 2.12; 2.17; 2.22; strong but deteriorating slightly 
B) 0.39; 0.40; 0.41; weak but improving slightly 
C) 2.56; 2.53; 2.46; strong and improving slightly 
D) 0.47; 0.46; 0.45; weak and deteriorating slightly

Quizplus · Accepted Answer

Debt ratio = Total Debt / Total Assets
For year 1: $118,000 / $249,000 = 0.47 or 47%
For year 2: $115,000 / $250,000 = 0.46 or 46%
For year 3: $113,000 / $251,000 = 0.45 or 45%
The ratios show that Celebration's leverage is weak and deteriorating slightly. The ratios are decreasing slightly each year, which means that the company is becoming less reliant on debt to finance its operations, but still has a relatively high level of debt compared to its assets.

The Following Selected Data Come from Celebration Company's Balance Sheets