This is an ultimate guide on how to calculate Debt to Equity (D/E) ratio with detailed example, interpretation, and analysis. You will learn how to use its formula to evaluate a firm's debt settlement capacity.
The debt to equity ratio, also known as liability to equity ratio, is one of the more important measures of solvency that you’ll use when investigating a company as a potential investment.
Essentially a gauge of risk, this ratio examines the relationship between how much of a company’s financing comes from debt, and how much comes from shareholder equity.
The more debt a business takes on to fund its operations, the greater level of risk it assumes, since a higher percentage of its financing is being provided by creditors as opposed to investors.
Most firms take on some level of debt, whether it’s to address cash restrictions in the absence of new investment money coming in, or to buy back some of their stock for the purpose of increasing the overall return on investment of the remaining shares.
But when a business becomes so mired in debt that it’s no longer capable of meeting its financial obligations, it can spell disaster for both the company and its shareholders.[Click to continue]
This is an ultimate guide on how to calculate Non-Current Assets to Net Worth Ratio with detailed analysis, example, and interpretation. You will learn how to use its formula to assess a business solvency.
The non-current assets to net worth ratio, or the fixed assets to net worth ratio, measures how much of a company’s investments are tied up in fixed or non-current assets.
Fixed assets include those that are low-liquid such as plant and equipment, properties and investments made in intangible assets.
These types of assets are usually not expected to be converted into cash within a single year and are also known as long-term assets.
An acceptable non-current assets to net worth ratio should be 1.25 or lower, as anything above this could mean that the company is highly illiquid and is therefore vulnerable to unexpected events.
Likewise, a ratio of between 1.25 to 1.50 and above might be considered of concern to investors as it could suggest that the business is relying too heavily on low liquid assets that they might have difficulty converting if needed.
It is worth noting that this will, however, vary from industry to industry.
And you must be aware that for capital intensive industries, such as manufacturing, this ratio might be higher but should not necessarily be deemed negative.[Click to continue]
This is a complete guide on how to calculate Debt to Income (DTI) ratio with in-depth interpretation, analysis, and example. You will learn how to utilize its formula to assess a company's solvency.
The debt to income ratio offers yet another way for you to measure a company’s income against its current debt load, but it does so by examining monthly revenues and recurring monthly debts.
Although this ratio is most often used by lending institutions to financially size up a personal loan applicant, it can also be used by those same institutions to gauge a commercial firm’s ability to remain solvent.
This becomes especially important in situations where a business may be looking to borrow additional funds.
The lender involved will want to make sure the company’s income is capable of supporting a higher level of debt, while still leaving enough cash to fund its regular operations.
In a similar fashion, the debt to gross income ratio can be used just as effectively by you, to evaluate a company’s debt load situation before you decide to invest.
Simply put, the D/I ratio allows you to calculate what percentage of a firm’s earnings is being spent to cover its monthly debt payments.
This is an in-depth guide on how to calculate Debt to Net Worth Ratio with detailed analysis, example, and interpretation. You will learn how to use its formula to assess an organization's solvency.
The debt to net worth ratio, also referred to as the total debt to total net worth ratio, is a simple calculation that can help you in evaluating the financial health of a given company by comparing the level of debt it has with its total net worth.
A firm’s net worth can be calculated by subtracting its total assets by its total long-term and short-term debt.
In a nutshell, if the business has more assets than its liabilities, its net worth will be positive.
And vice versa, if the business liabilities exceed its total assets, it will have a negative net worth.
This ratio is very useful when it’s used to determine how financially healthy a company is.
A high ratio tells you that the company that you’re considering investing in has already financed by a high level of debt, and it’s a riskier investment compared with other companies.
On the other hand, the low ratio indicates that the business has a low debt burden, which means it can easily cover or meet its debt obligation without having to sell a lot of assets.[Click to continue]