But that might have something to do with the fact that what you find on the balance

sheet is measured as a book value.

So now let's compute the same ratio, the same debt to equity ratio,

on the basis of market value, or at least the market value of equity.

We still take the book value of debt in the numerator.

So the same $12.3 billion of book value of debt divided

by a market value of $23.5 billion of

equity, significantly larger market value of equity than the book value of equity.

And that delivers a more common debt to equity ratio

across industries of 0.52, about 50% debt to equity ratio.

So what does that difference tell you?

Well it tells you that it clearly matters whether you take market values or

book values.

The significant difference between the debt to equity ratio of 4.3 versus 0.5.

Which is correct?

Well, that's a much more difficult question to answer.

What we should technically have done in the debt to equity ratio at the bottom

here, the $12.3 billion book value of debt

is replace debt by market value of debt as well.

But that metric is actually different, difficult, different and

difficult to measure in practice.

So for the sake of illustration, I've just indicated to you here the massive impact

that taking market value of equity would have on a metric like debt to equity.

Alternative to just considering debt over equity,

we could also compute a a ratio known as the debt ratio,

where we divide the same total debt as you will find it as total liabilities on

the balance sheet divided by total assets, which would,

of course, be liabilities plus equity in the denominator.

So if we do this for Kellogg's for 2013, we find that the debt ratio was 0.77.

If we do the same computation for 2014 for Kellogg's we see

that the debt ratio has increased to 0.81.

Again, both of these measures

are used on the basis of the balance sheet information, the book values of equity.

Market valuation would have had a significantly different outcome.

But the relative comparison over time, of course, is valid, so we see that the debt

ratio from Kellogg’s has gone from 0.77 and marginally increased to 0.81.

So over this time period, 2013 to 2014, Kellogg's became more indebted.

But that is just giving us an indication of the possible size of the problem,

the problem being the risk of ultimately ending up

in a situation where there is financial distress.

So a much better measure to capture that immediate likelihood of financial distress

is the next ratio we look at, Interest Coverage Ratio,

where we take one of these income metrics that you've seen when we

discussed the profit and loss statement, EBIT, Earnings Before Interest and Taxes

and divide that through by the interest expense,

what we need to repay to the liability holders.

That captures the ability of the firm to generate sufficient income

to actually meet its interest expense obligations.

So if we compute this metric for Kellogg's,

we find that Kellogg's was making $1 billion in 2014 of net income

of earnings before interest and taxes, I should say and divide that through

by the interest expense of 209 million for the financial year 2014.

And that gives us a healthy interest coverage ratio of 4.95.

So clearly, Kellogg's is not in immediate financial distress.

So summing up, these metrics which capture leverage,

which capture the risk of the firm entering financial distress,

is given here with the debt to equity ratio, compared between Kellogg's and

Kraft, the debt ratio, the debt to total assets for Kellogg's and

Kraft, both for 2014 and 2013, and the interest coverage ratio.

What you should noteice by now with these competitor’s comparisons is the close

similarity between these two corporations, which is truly worth noting.