Discuss the significance and shortcomings of the following in relation to FMCG business: (i) Debt Ratio

The answer should cover the Debt Ratios and Efficiency Ratios. (i) Debt Ratios: These ratios concentrate on the long-term health of a business, particularly the effect of the capital and finance structure on the business. a) Debt to Equity Ratio : What you need: Balance Sheet The formula: Debt-to-Equity Ratio = Total Liabilities / Total Shareholder Equity What it means: Total liabilities and total shareholder equity are both found on the balance sheet. The debt-to equity ratio measures the relationship between the amount of capital that has been borrowed (i.e. debt) and the amount of capital contributed by shareholders (i.e. equity). Generally speaking, as a firm's debt-to-equity ratio increases, it becomes more risky because if it becomes unable to meet its debt obligations, it will be forced into bankruptcy. b) Interest Coverage Ratio: What you need: Income Statement The formula: Interest Coverage Ratio = EBIT / Interest Expense What it means: The interest coverage ratio, is a measure of how well a company can meet its interest payment obligations. Anything lower than 1.0 is usually a sign of trouble.