Broome County CAFR Article Example | Topics and Well Written Essays - 1000 words

Broome County CAFR - Article Example With the increased use of debt capital for financing, the magnitude of interest payable on outstanding debt increases (Megginson and Smart, 2008, p.53). The actual long term solvency would depend on the ability of the company to generate sufficient incomes from their operations so that they are able to service fixed interest payable on outstanding liability. Generally the ideal value of debt ratio should be less than 0.50. Debt Equity Ratio The Debt to Equity ratio is a measure of relative proportion of debt to shareholders’ equity that is used by the company to finance its assets. It is one of the indicators for long term solvency of a company. The two components of this ratio are derived from the balance sheet of the company that reflects the company’s financial position on a given date. The debt observed in this ratio is usually the long term debt of the organization. The composition of debt and equity in the capital structure of a firm determines influences value of firm and its long term solvency (Gibson, 2012, pp.285-286). Basically, this ratio is a measure of company’s future obligations relative in balance sheet to equity and higher values indicate that company’s long term debt exceeds shareholders’ equity. Hence, the ideal value should be less than 1. Financial Health Analysis When the balance sheet of Broom County was analyzed for the years 2006 and 2007, it was found that Debt Ratio of Governmental Activities was 50.61% and 49.06% respectively. As discussed earlier, the acceptable value of this ratio should be less than 50% and the organization seems to have deleveraged their balance sheet in the year 2007 from 2006. The value of this ratio from Business Activities for... This research is being carried out to conduct a long term solvency test on Broom County. It is referred to as the company’s ability to honor long term obligations. In order to assess the long term solvency of the firm there are many standard ratios available such as Debt size ratio, Debt to equity ratio, Cash flow coverage ratio, Debt service as percentage of revenues, and so on. In this study the long term solvency of Broom County was analyzed using two key ratios namely Debt size ratio and Debt equity ratio. The formulas for the respective ratios are as follows, Debt Size Ratio = Total Debt/Total Asset Debt-Equity Ratio = Total Debt/Total Net Asset Debt Size Ratio measures the degree of financial leverage of the company, and generally higher values indicate higher financial risk. The ratio indicates whether the company is in a better financial position to service its total debt with its total assets. The Debt to Equity ratio is a measure of relative proportion of debt to shareholders’ equity that is used by the company to finance its assets. It is one of the indicators for long term solvency of a company. When the balance sheet of Broom County was analyzed for the years 2006 and 2007, it was found that Debt Ratio of Governmental Activities was 50.61% and 49.06% respectively. As discussed earlier, the acceptable value of this ratio should be less than 50% and the organization seems to have deleveraged their balance sheet in the year 2007 from 2006. The value of this ratio from Business Activities for both the years are less than 50% and are hence within tolerable limits.