Long Term Financing to Equity ratio


What is the "long term financing to equity" ratio ?


This KPI takes its values from the Long-term Investments Covering margin and it divides them measuring the ability of the company to cover fixed investments (fixed assets) with all sources of permanent capital in percentage terms.

On the other hands, this ratio expresses in percentage terms the enterprise’s ability to cover its fixed investments with long-temr debts, considering therefore all the medium/long-term sources of the company, including shareholders’ contributions and loans and equity capital. 



How to calculate "long term financing to equity" ratio ?


This KPI expresses as a percentage value, the ability of the company to cover its fixed investments with equity and third party funds (medium / long-term sources including contributions and shareholder financing) as following the formula:




Its value is in fact the result of the ratio between sources of permanent capital (medium / long-term sources + equity's book value) and net fixed assets (long term investments). 


How to use this KPI ? 


It is widely used as an KPI of capital-financial solidity since the calculation values of the quotient are the result of the reclassification of the financial statements balance sheet using the timing criterion that allows to analyze the degree of correlation between sources and long-term investments. Therefore it values the equity and financial balance of the company in the medium / long term.

This percentage value indicates the aspect of the equity balance in a more broad sense about the company's solidity and what level the company is capitalized to guarantee and assure certain risks. However there is a weak point about this KPI since it says no much relevant information in terms of solvency, liquidity and financial sustainability of the company.

As a fact of the matter, in order to give to creditors greater security on their assets portfolio, a structural analysis of the company as such it won't be sufficient but still, it remains a valid and complementary KPI to be used for the credit risk analysis, as it must be able to grasp the compatibility and temporal consistency between loans and sources of financing in use, and therefore the equity balance of the in the financial sense.

However, on a Credit Risk Management perspective it would be necessary to use a greater number of indicators such as the following sample:

  1. Net Commercial Assets
  2. Elasticity of assets
  3. Elasticity of Total Liquidity
  4. Rigidity of Assets
  5. Elasticity of Current Assets



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