Leverage Ratio

Leverage ratio forecast the long term solvency of a firm. Leverage Ratios help to measure risk
that a business faces. It helps to assess level of debt and decides whether this level is appropriate
for your business or not.
Commonly used Leverage ratios encompass:
i.

Debt to equity

ii.

Solvency Ratio

iii.

Propriety/ Equity Ratio

iv.

Interest coverage/ Debt service Ratio

Debt Equity Ratio

A high debt/equity ratio generally means that a company has been aggressive in financing its
growth with debt. This can result in volatile earnings as a result of the additional interest
expense.
If a lot of debt is used to finance increased operations (high debt to equity), the company could
potentially generate more earnings than it would have without this outside financing. If this were
to increase earnings by a greater amount than the debt cost (interest), then the shareholders
benefit as more earnings are being spread among the same amount of shareholders. However, the
cost of this debt financing may outweigh the return that the company generates on the debt
through investment and business activities and become too much for the company to handle.
This can lead to bankruptcy, which would leave shareholders with nothing.
The debt/equity ratio also depends on the industry in which the company operates. For example,
capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2,
while personal computer companies have a debt/equity of under 0.5.
Formula:

Total Liabilities / Shareholders Equity

ATLAS BATTERY

EXIDE PAKISTAN

Years

Formula/Calculation

Ratio

Formula/Calculation

Ratio

2007

419,244 / 335,998

1.25

554,026 / 505,021

1.10

2008

626,638 / 406,312

1.54

1,018,053 / 590,314

1.72

2009

594,824 / 531,546

1.12

1,055,623 / 725,964

1.45

2010

656,000 / 684,154

0.96

1,754,611 / 900,499

1.95

2011

952,136 / 954,745

1.0

2,412,097 / 1,148,488

2.10

2012

1,117,871 / 1,340,066

0.83

2,048,596 / 1,444,724

1.42

2013

1,662,010 / 1,801,347

0.92

1,474,384 / 1,898,765

0.78

2014

2,768,642 / 2,384,566

1.16

3,302,413 / 2,281,470

1.45

Graphical Representation
2.5

1.5
Atlas Battery
Exide Pakistan

0.5

0
2007

2008

2009

2010

2011

2012

2013

2014

Analysis
If debt-to-equity ratio is 1.00 means that half of the assets of a business are financed by debts and
half by shareholders' equity. A value higher than 1.00 means that more assets are financed by
debt that those financed by money of shareholders' and vice versa. The debt to equity ratio of
Atlas Battery has satisfactory, some of the years company has decrease from 1 it means company

has less risky, its favorable for company and company has more financially stable and the
remaining years company has more assets are financed by debt that those financed by money of
shareholders' its unfavorable and its risky for company while the Exide Pakistan is more risky
then Atlas Battery because in six years company has high debt to equity ratio, company assets
are financed by the debts which is unfavorable to the company.

Propriety/Equity Ratio
The equity ratio is a financial ratio indicating the relative proportion of equity used to finance a
company's assets. The Equity ratio is a good indicator of the level of leverage used by a
company. The Equity ratio measures the proportion of the total assets that are financed by
stockholders and not creditors. The equity ratio throws light on a companys overall financial
strength. Besides, it is also treated as a test of the soundness of the capital structure. A higher
equity ratio or a higher contribution of shareholders to the capital indicates a companys better
long-term solvency position. A low equity ratio, on the contrary, includes higher risk to the
creditors.
Formula:

Total Shareholders Equity/Total Assets

ATLAS BATTERY

EXIDE PAKISTAN

Years

Formula/Calculation

Ratio

Formula/Calculation

Ratio

2007

335,998 / 755,242

44

505,021 / 1,303,162

39

2008

406,312 / 1,206,736

34

590,314 / 1,847,474

32

2009

531,546 / 1,300,156

41

725,964 / 2,036,587

36

2010

684,154 / 1,513,940

45

900,499 / 2,904,612

31

2011

954,745 / 2,080,667

46

1,148,488 / 4,010,501

29

2012

1,340,066 / 2,631,723

51

1,444,724 / 3,933,246

37

2013

1,801,347 / 3,637,143

49

1,898,765 / 3,803,185

50

2014

2,384,566 / 5,326,994

45

2,281,470 / 6,069,410

37

Graphical Representation

60

50

40
Atlas Battery

30

Exide Pakistan
20

10

0
2007

2008

2009

2010

2011

2012

2013

2014

Analysis
A ratio used to help determine how much shareholders would receive in the event of a companywide liquidation. From the above graphical representation the equity ratio of Atlas Battery and
Exide Pakistan is showing irregular trends. Atlas Battery is showing better equity position and
has a higher equity ratio of shareholders to the capital indicates a companys better long-term
solvency position against the Exide Pakistan. Atlas Battery is continuous increasing in 2008 to
2012, while Exide Pakistan is irregular trends but they decreasing against Atlas Battery.

Solvency Ratio
Solvency ratios measure the ability of a company to pay its long term debt and the interest on
that debt. Solvency ratios, as a part of financial ratio analysis, help the business owner determine
the chances of the firm's long-term survival. Solvency ratios are of interest to long-term creditors
and shareholders. These groups are interested in the long-term health and survival of business
firms. In other words, solvency ratios have to prove that business firms can service their debt or
pay the interest on their debt as well as pay the principal when the debt matures.
Formula:

100 Equity Ratio

ATLAS BATTERY

EXIDE PAKISTAN

Years

Formula/Calculation

Ratio

Formula/Calculation

Ratio

2007

100 - 44

56

100 - 39

61

2008

100 - 34

66

100 - 32

68

2009

100 - 41

59

100 - 36

64

2010

100 - 45

55

100 - 31

69

2011

100 - 46

54

100 - 29

71

2012

100 - 51

49

100 - 37

63

2013

100 - 49

51

100 - 50

50

2014

100 - 45

55

100 - 37

63

Graphical Representation
80
70
60
50
Atlas Battery

40

Exide Pakistan
30
20
10
0
2007

2008

2009

2010

2011

2012

2013

2014

Analysis
Both companies solvency ratio has been satisfactory and efficient. Exide Pakistan has high
solvency ratio it means company financed source is more than 50% to its equity in all the years,
company has strong financial position and company well manage and utilizing its equity sources

and well controlled to its debt financing while Atlas Battery solvency ratio has also good and
they controlled to its debt financing and it depends more than 50% on equity financed but Its not
better then Exide Pakistan. Exide Pakistan has high ratio against Atlas Battery.

Debt Services / Interest Coverage Ratio

The interest coverage ratio is a measure of a company's ability to meet its interest payments.
Interest coverage ratio is equal to earnings before interest and taxes (EBIT) for a time period,
often one year, divided by interest expenses for the same time period. The interest coverage ratio
is a measure of the number of times a company could make the interest payments on its debt with
its EBIT. It determines how easily a company can pay interest expenses on outstanding debt.
Interest coverage ratio is also known as interest coverage, debt service ratio or debt service
coverage ratio. The lower the interest coverage ratio there is more debt burden on company and
greater the possibility of bankruptcy of a firm. A higher ratio indicates a better financial health
as it means that the company is more capable to meeting its interest obligations from operating
earnings.
Formula:

EBIT / Interest Expenses

ATLAS BATTERY

Years

Formula/Calculation

2007

EXIDE PAKISTAN
Ratio

Formula/Calculation

Ratio

122,257 / 22,042

5.55

139,859 / 32,915

4.25

2008

164,131 / 41,536

4.0

143,154 / 49,099

3.0

2009

272,880 / 43,537

6.30

182,003 / 82,521

2.2

2010

341,289 / 19,857

17.2

303,554 / 78,948

4.0

2011

525,101 / 37,515

14.0

429,726 / 128,489

3.3

2012

689,649 / 69,896

10.0

500,926 / 157,099

3.2

2013

822,898 / 59,946

14.0

754,329 / 38,327

20.0

2014

1,022,768 / 126,025

8.11

603,457 / 96,423

6.26

Graphical Representation

25

20

15
Atlas Battery
Exide Pakistan

10

0
2007

2008

2009

2010

2011

2012

2013

2014

Analysis
Both companies has not favorable and both companies must focus on interest or debt services
because if they unable to increase interest coverage ratio there is more debt burden on both
companies and greater the possibility of bankruptcy of a firm.
From the above graphical representation it is showing Atlas Battery has higher ratio indicates a
better financial health as it means that the company is more capable to meeting its interest
obligations from operating earnings and Exide Pakistan has lower ratio it is not favorable for the
company because company has more debt burden. Only one year company has higher ratio and
other years company unable pay its debt services.