Ratios

LEVERAGE RATIO ANALYSIS

The first ratio we looked at is the interest coverage ratio, which is used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company’s earnings before interest and taxes (EBIT) of one period by the company’s interest expenses of the same period. The lower the ratio, the more the company is burdened by debt expense.

Ace Limited over the past five years hasn’t substantially beaten the industry average from 2004-2006 they lagged behind the industry on average and since then have only beaten the industry average by one times as much, which isn’t impressive. This means for three years Ace wasn’t able to outdo the industry in regards to their interest coverage ratio and since 2006 have only been able to beat the industry by one times as much. Ace could potentially run into problems into the future due to some of their liquidity ratios. Their average collection period is 471 days compared to the industry average of 262 this shows that Ace is having problems collecting their receivables, which could potentially lead to liquidity problems if they need quick money.

Our second ratio is debt to equity or the long term debt to common equity which is a measure of a company’s financial leverage calculated by dividing its total liabilities by stockholders’ equity. This is used to indicate what proportion of equity and debt the company is using to finance its assets. It is better to have a lower debt to equity ratio, because a higher ratio indicates the company is at a greater risk to default.

Ace isn’t a highly liquid company their total debt is greater than their total cash, which isn’t investors is enticing. Ace’s percentage of debt in relation to their assets isn’t very impressive when compared to the industry average over the past 5 years has trailed behind the industry by almost one times as much. Their average debt to equity ratio over the past five years is close...