Progressive is a company in the United States dealing in insurance and investment in various areas. The insurance sector is based on the automotive industry, property, and personal and commercial sectors. The company also delves into the investment of property financing for the automotive industry and personal loans. Below is a table representing the organizations leveraging ratios to ascertain the organization's financial progress from 2016 to the year 2020.
| Ratios/Year | 2016 | 2017 | 2018 | 2019 | 2020 |
| Debt-to-assets ratio | 0.75 | 0.76 | 0.76 | 0.75 | 0.86 |
| Debt-to Equity ratio | 3.20 | 3.17 | 3.30 | 3.02 | 2.76 |
| Interest Coverage ratio | 10.57 | 16.95 | 23.61 | 29.88 | 33.47 |
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Leverage financial ratios are used to measure the amount of capital gained from long-term debt. Therefore, leverage financial ratios are used to determine the company's debt level and whether the debt is helping the organization grow its capital (CFI.com, 2018) . The first ratio is the debt to assets ratio, also known as the debt ratio. From 2016 to 2020, the organization's debt ratio has been below one meaning that Progress has not been utilizing its debts in growing the organization's assets (Zelgalve & Berzkalne, 2015). The primary goal for an insurance company is to indemnify customers who claim indemnity from a pool of premiums customers contribute annually. The pooled amount is invested in other financial sectors to generate more income, and if the long-term debt is not being utilized to generate more assets, then it is a worrying condition for the organization.
The second ratio is the debt-to-equity ratio which measures the gravity of debt and liabilities against shareholders' equity. The ratio is associated with risk meaning that the higher ratio, the higher the risk, and the company is financing its growth with debt (Efendi et al., 2019). The organization's debt-to-equity ratio has been above 3 from 2016 to 2019, then dropped to 2.76 in 2020. For an ideal dependence of debt to generate assets, the ratio should not go beyond 2 but depends on the kind of organization. However, the situation is not healthy for Progress insurance as it needs to have a debt-to-equity ratio below 2. The company is financing most of its growth through debt and this is a financially unhealthy position because debt is being used to finance growth for the organization while the debt is an expense that is paid in installments with an interest.
The last ratio is the interest coverage ratio which measures the organization's ability to pay interest expense with its operating income. The values are all over 10 in 2016 through to 30 in the year 2020, showing that the organization is well within its capabilities to pay interest expense using its operating income. The overall deduction about Progress is that it is using debt in the wrong way. It should be using debt to grow its assets and not to fund growth. In the income statements, it may seem that the organization is growing in terms of net income, but assets on the balance sheet remain the same or reduce. The ideal situation is that the debt should be used in growing organizational assets.
References
CFI.com. (2018). Leverage Ratios - Debt/Equity, Debt/Capital, Debt/EBITDA, Examples . Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/knowledge/finance/leverage-ratios/
Zelgalve, E., & Berzkalne, I. (2015). The Impact of Debt Ratios on Corporate Financial Performance: the Case of Baltic Listed Companies. Applied Economics: Systematic Research , 9 (1), 107–125. https://doi.org/10.7220/aesr.2335.8742.2015.9.1.7
Efendi, A., Putri, L. P., & Dungga, S. (2019). The Effect of Debt to Equity Ratio and Total Asset Turnover on Return on Equity in Automotive Companies and Components in Indonesia. Proceedings of the 3rd International Conference on Accounting, Management and Economics 2018 (ICAME 2018) . https://doi.org/10.2991/icame-18.2019.20
