Reference no: EM132987274

The best ratio out of the two that can be used by businesses to predict the future issues related to debt on the businesses is the Debt Ratio. After comparing the two, Debt ratios are considered to be the best ratio. It is work is used to measure if the firm has got the ability to pay back there both long term and short term debts. It is being calculated by getting the total of total debt dividing it by the total assets After the calculation has been calculated and one finds that the ratio gotten is very high that one will imply that the risk that is being associated with the firm will be so high. The firm's operations might be affected greatly and to some extent, the business might be forced to shut down their operations because there will be no money to support the activities to be done. Adding the greater debt to the assets will show also that the firm will experience a low borrowing and that one will automatically bring the firm's financial position to be down. Therefore in conclusion the business that will have a high debt ratio will be in a dangerous position to catty out their activities if the creditors start to demand back their money and resources. likewise, the time's interest earned ratios are also used to measure if the company is in a position to honor their payments of debts by strictly paying them out as they had agreed by the lenders it is calculated by getting the EBIT then dividing it out by the total interest payables. After calculating the ratio gotten if it is negative then generally it will imply that the firm has got serious issues that is affecting it hence it stands in a position of not paying out their debts but also if the positive value is gotten then it is not also not indicating that the business has got a lot of cash it generally denotes that there are changes in the working capital of the business. Therefore after comparing the two ratios one can easily see that the debt ratios can generally be used as a predictor to predict what are the effects that the business can get through a lot of debts and when it has got the financial crisis hence the business can also look for some ways to be able to manage those effects.

Problem 1: If you used this information to help identify potential problems for a business what would you suggest a point to begin in their efforts to make corrections to the operations that would improve the financial health of their business, ie. where would your start? Please include a reference