Question

Be original and use your own word.

2. What are some factors to consider in evaluating a company's ability to make payments on outstanding debt? Please explain the factors rather than just providing a list.

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Answer 1

Answer:-

The factors that can be considered in evaluating a company's ability to make payments on outstanding debt are

EBITDA :- The Earnings before interest taxes depreciation & amortization (EBITDA) s one of the key metrics used to evaluate the debt repayment. The companies with high EBITDA has higher chances of debt repayment. The consistently growing EBITDA levels improves the company's ability the clear debt.

The balance sheet ratio Debt / Equity is very important in measuring the debt levels. The lower ratio represents the good financial health of the company. The Debt / Total capital ratio is also an important metric that helps the analyst to judge how well the company is maintaining it's debt levels.

The Debt / EBITDA ratio which is an important cash flow metric that can be used in evaluating the time required by the company to clear the outstanding debt. The lower the ratio the better the is for the company.

The interest coverage ratio which is EBIT / Interest expense is one of the most important ratio that evaluates the company to pay the interest incurred from the debt. The higher ratio shows that the company will be able to service the interest on debt on better terms.

The cash interest coverage ratio gives the overview of how the company's cash flow generated can be used to service the interest expense incurred on debt.

The Debt service coverage ratio which measures the cash flow available to repay current debt obligations and is a very useful metric used in real estate sector which is a high capital intensive industry.