Which metrics are typically used to evaluate a company’s capital structure?

Which metrics are typically used to evaluate a company’s capital structure?

• A. Price-earnings ratio and market cap
• B. Debt-to-equity ratio and interest coverage ratio
• C. Return on assets and equity
• D. Cash flow and liquidity ratio

Answer: (B)

The debt-to-equity ratio and interest coverage ratio are key metrics used to evaluate a company's capital structure because they specifically measure the relationship between a company's debt and equity financing, as well as its ability to pay interest on its debt. The debt-to-equity ratio indicates how much debt a company is using to finance its assets relative to the shareholders' equity. A higher ratio can indicate more leverage and potentially higher financial risk, while a lower ratio suggests a more conservative approach to financing. The interest coverage ratio, on the other hand, assesses the company's ability to meet its interest obligations from its operating income. This ratio is crucial for understanding how well a company can afford its debt payments, which directly relates to its financial stability and attractiveness to investors and creditors. These two ratios together provide a comprehensive view of how a company is financing its operations and how well it can manage its debt obligations, making them essential for analyzing a company's capital structure.

The debt-to-equity ratio and interest coverage ratio are key metrics used to evaluate a company's capital structure because they specifically measure the relationship between a company's debt and equity financing, as well as its ability to pay interest on its debt.

The debt-to-equity ratio indicates how much debt a company is using to finance its assets relative to the shareholders' equity. A higher ratio can indicate more leverage and potentially higher financial risk, while a lower ratio suggests a more conservative approach to financing.

The interest coverage ratio, on the other hand, assesses the company's ability to meet its interest obligations from its operating income. This ratio is crucial for understanding how well a company can afford its debt payments, which directly relates to its financial stability and attractiveness to investors and creditors.

These two ratios together provide a comprehensive view of how a company is financing its operations and how well it can manage its debt obligations, making them essential for analyzing a company's capital structure.