Ratios which reflect ability to meet long-term debt obligations and preferred dividends

A company's long-run solvency depends on the success of its operations and on its ability to raise capital for expansion or even survival over difficult times.  Also, common shareholders will benefit from the leverage obtained from borrowed capital which earns a return. 

A key measure in evaluating long-term structure and capacity is the debt to equity ratio.  If this ratio is too high, it may indicate the company has used up its borrowing capacity and has no cushion for future events.  If it is too low, it may mean available leverage is not being utilized to the owners' benefit.  If the ratio trend is up, it may mean earnings are too low to support the needs of the enterprise.  And, if the trend is down, it may mean the company is doing well and expansion is in sight.

Tangible net assets to equity ratio indicates the current quality of the company's equity by removing those assets whose realization is wholly dependent on future operation.  This ratio can be used to better interpret the debt to equity ratio.

Lenders are generally concerned about a company's ability to meet interest payments as well as their ability to repay principal amounts.  The latter can be appraised by evaluating the company's long-term prospects as well as its net assets position.  The realizable value of assets is important in this regard.

The ability of a company to make interest payments is more a function of the company's ability to generate positive cash flows from operations in the short run, a well as over time.  Thus, times interest earned shows how comfortable the company should be able to make interest (and preferred dividend) payments assuming earnings trends are stable.

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