Aswath Damodaran 322
Medians of Key Ratios : 1998 - 2000
AAA AA A BBB BB B CCC
EBIT interest cov. (x) 17. 5 10. 8 6. 8 3. 9 2. 3 1. 0 0. 2
EBITDA interest cov. 21. 8 14. 6 9. 6 6. 1 3. 8 2. 0 1. 4
Funds flow/total debt 105. 8 55. 8 46. 1 30. 5 19. 2 9. 4 5. 8
Free oper. cash
flow/total debt (%)
55. 4 24. 6 15. 6 6. 6 1. 9 – 4. 5 - 14. 0
Return on capital (%) 28. 2 22. 9 19. 9 14. 0 11. 7 7. 2 0. 5
Oper.income/sales
(%)
29. 2 21. 3 18. 3 15. 3 15. 4 11. 2 13. 6
Long-term
debt/capital (%)
15. 2 26. 4 32. 5 41. 0 55. 8 70. 7 80. 3
Total Debt/ Capital
(%)
26. 9 35. 6 40. 1 47. 4 61. 3 74. 6 89. 4
Number of firms 10 34 150 234 276 240 23
To estimate the cost of debt, we will estimate a bond rating for the firm, using
financial ratios. This page provides the averages for key ratios used by S&P to
rate manufacturing firms between 1993 and 1995.
We will actually build the entire analysis around the first ratio (pre-tax interest
coverage ratio = EBIT/Interest expenses) to
Keep the analysis simple (It is relatively straightforward to expand it to
include multiple ratios)
Focus on a ratio that will change as the leverage changes
Focus on a ratio that has been shown to be highly correlated with ratings.
