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Why might it be possible for a company to make a large operating profit, yet still be unable to meet debt payments when due? What financial ratios might be employed to detect such a condition?


The BIDaWIZ Team's Answer:

Even if a company generates a large operating profit, if the company

is too heavily leveraged, it is quite possible that the Company is not able

to satisfy its debt obligations. The most common ratio, used to measure

long term solvency, is the "debt to equity" ratio.This measures the company

capital structure. A high debt to equity ratio, means that the company is

heavily leveraged, and at risk of default, on its long term debt.

The BIDaWIZ Team



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