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Debt Ratio Explained |
Debt
ratio
is a proportion of company's assets and debts which
affects the borrowing
potential of a company. It is quite easy to understand what is debt
ratio
and why it is important that this ratio was equal to 1. A simple answer
to a
question what is debt ratio is
that debt ratio is a total
amount of
your company's debts divided to a total amount of your
company's
assets.
If this ratio exceeds 1, company has more debts
than assets or is even insolvent. Knowing the amount of your
company's debts
and assets makes it easy to calculate
debt ratio. And after you
calculate debt
ratio you can see if your company is under a risk of insovency
or not.
Long term
debt ratio is a little bit more complicated to calculate, but is
still very easy
to
understand. The amount of long term debts of the company is
divided to both preferred
and common stock plus this long term debt is equal
to the long term debt ratio.
This ratio can show the effectiveness of your company and if long term
debt
ratio is high your company can be considered risky. High debt ratio
makes it
rather difficult to borrow more funds for your company as creditors are
not
interested in insolvent or risky clients. If your company has got more
liabilities
than equities, this will result in high
debt ratio. Try to find
possibility to
refinance your debts and make debt
ratio lower if you want to ensure
financial
stability and future leverage of your company. |
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