Number of Times Interest Charges Are Earned$218.6$14.5
16.1
$14.5Number of Times Interest Charges Are Earned$207.6$9.1
23.8
$9.1The number of times interest charges are earned indicates that both companies have
excellent coverage, with slight favoring of Borders. Lenders will generally be con-
cerned if this ratio drops below 2.Ratio of Total Liabilities to Total Assets. The second leverage measure compares
the total liabilities to the amount of total assets. To illustrate, assume that you bor-
rowed $80,000 and used $20,000 of your own funds to purchase a $100,000 house. Your
debt as a percentage of the total value of the house would be 80% ($80,000 ÷ $100,000).
In a similar way, analysts can measure a company’s relative use of debt by measuring
the ratio of the total liabilities to the total assets. The ratio of total liabilities to total
assetsis calculated as shown:^7Ratio of Total Liabilities to Total AssetsTotal Liabilities
Total AssetsTo illustrate, fiscal 2004 annual reports for Barnes & Noble and Borders disclosed the
following:Barnes & Noble, Inc. Borders, Inc.
Total liabilities $2,135.6 $1,538.5
Total assets 3,301.5 2,628.8The ratio of total liabilities to total assets for Barnes & Noble and Borders is 0.65 and
0.59, respectively, calculated as follows:Ratio of Total Liabilities to Total Assets$2,135.6
0.65
$3,301.5Ratio of Total Liabilities to Total Assets$1,538.5
0.59
$2,628.8Barnes & Noble has slightly more relative debt as a percent of total assets than does
Borders. This is the likely reason for Barnes & Noble’s smaller interest coverage.
Regardless, both companies appear to be having little difficulty managing their
debt.466 Chapter 10 Liabilities
7 The ratio of total liabilities to total stockholders’ equity is another common leverage measure. This ratio
is algebraically related to the ratio of total liabilities to total assets and thus conveys the same relative
information.