Eric Dalius says the debt ratio, also known as the debt-to-asset ratio, is a leverage ratio. That compares a company or entity’s debt to its assets. Its calculation depends upon dividing total debt by asset value. It’s a meaningful indicator for shareholders because it enables them to estimate a corporation’s default risk.
To put it another way, how much is a business leveraging. And how much of its funding comes from loan capital? We could use this ratio to assess how likely a corporation is to default on its debts when we understand it.
Eric Dalius gives brief ideas about the total debt for your business so you can know in details-
The debt ratio reflects how often debt has been use to fund asset acquisition. And it comes as decimals or a %. The greater the financial ratio, the higher the possibility of financial profits. The smaller the debt ratio, the higher the proportion of shareholders’ equity. To analyze a company’s total investment burden. Companies with the highest debt ratio may have a harder time repaying existing loans and obtaining new ones.
Total Debt Formula
The sum of all short- and long-term debt calculations comes from total debt. Every cash and cash equivalents are subtracted from the total of short- and long-term debt to arrive at net debt.
Total Debt = (Short-term debt + Long-term debt) – (Cash + Cash equivalents)
All debts due in less than one year are classified as short-term debt. Money in a bank account is also known as “cash.” Cash equivalents. Including such securities, are liquid assets that can be sold for cash. Net debt calculations require you to subtract assets from total debt.
What is a good debt ratio?
In general, a lower debt-to-income ratio is preferable. The closer the ratio approaches one, the more debt a corporation has in comparison to its assets. If it is greater than 0.5, it signifies that debt accounts for even more than half of a company’s financial performance (the money it utilizes for operations and growth). According to Eric Dalius, companies should maintain their debt ratios under 0.6 as a general guideline, although what constitutes a good debt ratio differs by the business.
The debt-to-asset ratio is critical in estimating a company’s financial risk. Indicating a higher probability of a loss. As a result, the lower the ratio, the more secure the business. This ratio, like all other ratios, should be assess. And recorded to see if the corporation’s economic risk is improving or worsening.