Debt Management Ratios

If you want the details of how a company is doing, you can take a look at the debt management ratios. It's a measure to indicate how much assets of a company are financed through bank debt. It gives a measure of the amount of money a company raises with the help of creditors, besides giving an idea of how well a company is able to manage financial distress. Business debt if used as a financial leverage can give excellent returns to stockholders, besides allowing an organization to increase profits in the long run. Usually, debt represents a cost which is used to finance the assets of a company. It's only if the firm can earn a profit from these assets that the company can remain in business, and that can only be done if there is a proper understanding of debt management ratios.

What are Debt Management Ratios

Whether you call it equity multiplier, debt-equity ratio or debt ratio, they mean one and the same; to measure how much a creditor uses to fund assets. There may be other forms of financing for a company like personal savings and stocks, but these are not included in debt management ratio. For calculating the debt ratio, you need to divide the total debt by total assets. So the formula is:

Debt Ratio = Total Debt/Total Assets = Total Assets - Total Owner's Equity/Total Assets

How to Apply Debt Management Ratios

Irrespective of whether you are an owner, investor or just a manager of an organization, the financial health of your business can be analyzed by going through the financial statement and specifically looking at corporate debt management ratio. If you are an investor, you must know where your money is being used, as it has a great effect on the dividends you would get. If you as a business owner want to analyze how your business operations are doing as compared to the competitors in the industry, debt management ratio in the financial statement can give you a fair idea of that.

For applying debt management ratios, you need to go to the website of the organization in which you have invested and go through the current financial statement of the company. You can find the financial statement in the space provided for financial information of the company where you can also find the annual report.

Once you have found the financial report, you can easily find the total debt ratio. How? You need to divide the liabilities of the company, which is found in the financial report, by the total assets. With this once you get the debt ratio, you need to compare this figure with that of competing businesses. This would give you an idea of how the company is doing in comparison with the competitors.

You also need to take into consideration the amount a company earns before amortization, depreciation, taxes and interest, as this measures whether a company would be able to repay debts in the short term. The total amount you get after adding these (amortization, depreciation, taxes and interest) should be added to the lease payments. All this information is available in the financial statement of the company. This ratio can be compared with the ratio of the other companies in the industry. If the ratio is high, it means that the company is in a better financial health.

So, all in all, debt management ratios are a very important component of the financial statement of a company. It gives an indication of how well a company is doing, besides giving an idea of how much a company has raised from creditors.