A debt ratio, also called a “debt-to-income (DTI) ratio,” can be used to describe the financial health of individuals, businesses, or governments. A company’s debt ratio tells the amount of leverage it’s using by comparing its debt and assets. It is calculated by dividing total liabilities by total assets, with higher ratios indicating higher degrees of 澳洲幸运5开奖号码历史查询:debt financing. Debt ratios vary greatly among industries, so🅷 when comparing them from one company to the other, it’s important to do so within the same ind༒ustry.

You can calculate the debt ratio of a company from its 澳洲幸运5开奖号码历史查询:financial statements. Whether or not it’s a good ratio depends on contextual fa🅰ctors; there is no universal number. Let’s take a look at what these ratios mean, what the variations are, and how they’re used by corporations.

What Certain Debt Ratios Mean

In terms of risk, ratios of 0.4 (40%) or lower are considered better ones. As the interest on a debt must be paid regardless of business profitability, too much debt may compromise the entire operation if cash flow dries up. Companies una🍷ble to service their oܫwn debt may be forced to sell off assets or declare bankruptcy.

A debt ratio of 0.6 (60%) or higher makes it more difficult to borrow money. Lenders often have debt ratio limits and won’t extend further credit to firms that are 澳洲幸运5开奖号码历史查询:overleveraged. Of course, there are other factors as well, such as 澳洲幸运5开奖号码历史查询:creditworthiness, payment histo💖ry, and professional relationshi🔥ps.

On the other hand, investors rarely want to purchase the stock of a company with extremely low debt ratios. This is because a 0% ratio means that the firm never borrows to finance incre🧸ased operations, which limits the total return that can be realized and passed on to sharehol😼ders.

While the 澳洲幸运5开奖号码历史查询:debt-to-equity ratio is a better measure of opportunity cost than the basic debt ratio, one principle still holds true: There is some 澳洲幸运5开奖号码历史查询:risk associated with hꦑaving too little debt. This is because 澳洲幸运5开奖号码历史查询:debt financing is usually cheaper form than 澳洲幸运5开奖号码历史查询:equity financing. The latter is how corporations usual♍ly raise capital, selling additional shares to address short-ter🌃m needs.

Leveraging Financial Strength

Larger and more established companies generally can push the liabilities side of their ledgers further than smaller or newer companiꦺes, because they tend to have more-solidified cash flows and negotiable relationships with their lenders.

Debt ratios are also interest-rate sensitive. All interest-bearing assets have ꧃interest ra꧑te risk, whether they are business loans or bonds. The same principal amount is more expensive to pay off at a 10% interest rate than it is at 5%.

All debt ratio analysis should be done on a company-by-company basis. This is because while all companies must balance the dual risks of debt—credit risk and opportunity cost—ce𓆏rtain sectors are more prone to large levels of indebtedness than others. Capital-intensive businesses, such as manufacturing or utilities, can get away with slightly higher debt ratios when they are expanding operations.

It is important to evaluate industry standards and historical performance relati♚ve to debt levels. Many investors look for a company to have a debt ratio between 0.3 (30%) and 0.6 (60%).

The Bottom Line

Understanding a company’s debt profile is a critical as🐻pect in determining🦩 its financial health. Too much debt and a company may be in danger of not being able to meet its interest and principal payments, as well as creating a strain on its finances.

Too littlꦆe debt and a company may not be utilizing debt in a healthy way to grow its business. Understanding the debt ratio within a specific context can help analysts and investors determine a good investment from a bad one.