v Activity 6 RATIO ANALYSIS Debt Ratio Purpose: Understand the information provided by the debt ratio. Identify the expected range and whether an increasing or decreasing trend is preferred. The debt ratio compares total liabilities to total assets. This ratio measures the proportion of assets financed by debt. It is a measure of long-term solvency. DEBT RATIO = Total liabilities Total assets ($ in 000s) CITIGROUP 12/31/99 HEWLETT- PACKARD 10/31/99 JOHNSON & JOHNSON 1/03/99 WAL-MART 1/31/99 Assets $716,937,000 667,251,000 $35,297,000 17,002,000 $26,211,000 12,621.000 $49,996,000 28,884,000 Liabilities $18,295,000 $13,590,000 $21,112,000 Stockholders' $ 49,686,000 Equity Source: Disclosure, Inc., Compact D/SEC, 2000. Dmite balay 5. Assume that the debt ratio indicates the degree of financial risk. (Citigroup / Hewlett-Packard / Johnson & Johnson / Wal-Mart) is assuming the most financial risk. For a company wanting to be lower risk and less dependent on debt, a[n) (increasing / decreasing) trend in the debt ratio is considered favorable. A company that has higher financial risk will, in general, be required to pay (higher / lower) interest rates when borrowing money. 6. Explain why a company with a greater debt ratio tends to be a higher financial risk. 7. Does a high debt ratio indicate a weak corporation? (Yes/No) Explain your