Friday, August 1, 2014

Ratio Analysis : Debt Ratios


Series : Ratio Analysis    (11 th Post)

This Ratio helps us to understand a company Debt in relation to the Assets.The Ratio helps to identify the overall level of financial risk the company is in along with the shareholders.It shows how much the company relies on debt to finance assets

The higher the ratio, the greater the risk associated with the Company’s operation. A low debt ratio indicates conservative financing with an opportunity to borrow in the future at no significant risk.

There are two types of liabilities - operational and debt. Operational liabilities  includes balance sheet accounts, such as accounts payable, accrued expenses, taxes payable, pension obligations, etc. The Debt Liabilities  includes notes payable and other short-term borrowings, The term "debt" is used synonymous with total liabilities.

The optimal debt ratio is determined by the same proportion of liabilities and equity as a debt-to-equity ratio. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt.
Maximum normal value is 0.6-0.7. But it is necessary to take into account industry specific, explained in the article about debt-to-equity ratio.

Formula Debt Ratio % = Total Liabilities / Total Assets

Next Post on Ratio Analysis:  Debt Ratios :Debt Equity Ratio

In my quest for learning value investing I came acrros this interesting article and thought would like to share this with the community
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1 comment:

  1. Having a good understanding of such ratios helps in understanding a company's performance. A quality fundamental analysis is must to decide how a stocks is going to perform in future. To perform well in commodity market traders can rely on usage of mcx tips .