Debt Ratio
Debt ratio – a key financial multiples used to analyze the state of the entity, the tracking of negative trends and their timely removal.
Function and application
Debt ratio – an indicator to monitor the amount samsthapanarthaya based on the information of balance and reporting on financial results. Is used:- the company's management to identify the effectiveness of management decisions;
- creditors – to assess the degree of risk;
- investors to generate hypotheses about the potential profitability and possible dividends.
- of the company;
- industry economy;
- different work periods of the same enterprise;
- results of activity of business entities with the average for the industry.
Calculation
The debt to creditors (dividend) is the sum of the indicators displayed in the following lines of the balance:
- 590 – the aggregate amount of long-term obligations with maturities from one year;
- 690 – the aggregate amount of short-term borrowings of the company, the term of settlement which is less than a year;
Mathematically, a factor is the result of the addition of the already mentioned indicators (590 and 690), as well as balance line 490, showing the capital and reserves.
The formula for calculating the debt ratio with reference to articles of the balance sheet:
The formula of debt ratio with reference to accounting articles
Interpretation
The value of the debt ratio should be in the range from 0 to 1.The greatest financial stability of a company shows when DR ≈ 0. This figure confirms that the volume of debt liabilities of a business entity is extremely small compared to the capital. However, undue avoidance of borrowing may lead to a slowdown in the development of the company.
Acceptable is a value in the range short-circuit ≤ 0,5. However, the normal values may differ for different sectors of the economy.
The approach of the debt ratio to unity (DR ≈ 1) means the extreme degree of dependence of the entity from the counterparty. Delays in accounts receivable quickly lead to a shortage of working capital and the need to resort to short-term loans.
Figure DR ≥1 is a sign of insolvency. This situation obliges the administration of the institution to immediately contact the court with a bankruptcy petition.
A special debt ratio
It should be noted that in addition to the debt ratio, there are other indicators, figures which reflect the real condition of the company. The current debt ratio shows the share of short-term borrowings in the total capital structure. Calculated by the formula:
The normal rate of 0.1 – 0.2.
The turnover ratio of receivables along with the duration of the period of collection dismantles the degree of mobility of the current assets of enterprises. Calculated by the formula:
Turnover ratio of payables displays the speed of payments to creditors. Formula of calculation:
