As we learned in the previous class, financial ratios are grouped into the following categories. Liquidity ratios, leverage ratios, efficiency ratios, profitability ratios, and market value ratios. In this class, we are going to discuss leverage ratio with actual numbers. Leverage ratios, in other words, long-term solvency ratio. That is, leverage ratio measures firm's ability to pay its long-term debt. There are three commonly used measures and some variations. Total debt ratio is total debt / total assets. Your total debt includes all debts of all maturities to all creditors. Total debt is measured by subtracting total equity from total assets. In case of Samsung Electronics, total debt ratio is 26%. That is, Samsung has $0.26 in debt for every $1 in assets. In other words, there are $0.74 in equity for every $0.26 in debt. Another measures of leverage are the debt-equity ratio and equity multiplier. Debt-equity ratio is total debt / total equity. And the debt-equity ratio of Samsung is 0.35 or 35%. The equity multiplier is total assets / total equity, and it is 1.35 for Samsung Electronics. That is, Samsung's total assets are 1.35 times of its equity. As you may have noticed, equity multiplier is the debt-equity ration plus 1. For Samsung's case, debt-equity ratio of 35% plus 1 = 1.35. You may also have noticed that, given any one of these three ratios, you can immediately calculate the other two. That is, all say exactly the same thing. However, different people mean different things by the term debt ratio. Some mean a ratio of total debt, and some mean a ratio of long-term debt only. And unfortunately, the substantial amount of people are simply vague about which one they are mean. Therefore, it is important to define what people mean when they talk about debt ratio. Another common measure of long-term solvency is the times interest earned ratio, which is EBIT / interest expenses. This ratio is also called interest coverage ratio. As you can tell from the name of the ratio, this ratio measures how well a firm has its interest obligations covered. The times interest earned ratio for Samsung is 33.94 times. That is, Samsung makes operate income about 34 times of its interest expenses. The problem with the times interest earned ratio is that it is based on EBIT. Which is, as you learned in the previous course, not really a measure of cash available to pay interest. An approximation of cash available to pay interest is EBIT + depreciation + amortization, since depreciation and amortization are not cash expenses. Using this cash definition, we can define this cash coverage ratio as EBIT + depreciation + amortization / interest. The numerator here is often called EBITDA for short. And it means earnings before interest, tax, depreciation, and amortization. These are basic measures of the firm's ability to generate cash from operations. The cash coverage ratio for Samsung is 60.88 times. That is, Samsung has enough cash from operation to pay its interest expenses.