Debt ratio


What is the Debt Ratio ? 


It is important to evidence that the amount of total liabilities is combined by current liabilities and long-term liabilities as it is given in the balance sheet of the company's annual financial statement of account for its assets and its liabilities.


How is calculated the Debt-Ratio ?


The Debt-ratio reveals the amount of money that a company owes to its creditors. It represents in percentage terms the impact of the total sources of financing from third parties based on the total invested capital in the company as additional but important financial information for stakeholders.




As we can see, it is important to consider that the debt-ratio formula does not consider the effective leverage setted in the invested equity capital so that consequantly, this KPI does not consider shareholders as creditors due to their shareholding financing and this because of in the bankrupcy legislation


How to monitoring Debt-Ratio ?


Well, there would be many answers to this question mark.  The most important would make sense in cases where You need to understand or describe the company's total debt and therefore its solvency, or instead, the level of leverage of the financial structure of the company, typically when analyst wants to investigate how much the company is exposed to third parties. To that extend, that is the indicator that provides better information on the company's financial risk, still generally speaking. This information, in fact, is mainly provided by knowing the overall financial statement and balance sheets of the company. 

Banks use this indicator for internal credit assessments of a company, although they use internal methods developed specifically during the Basel 2 and Basel 3 period which help their Internal-Rating-System (IRS-Based) allow for easy assessment the company's global debt, make comparisons by monitoring the percentage values. Direct debt ratios above certain thresholds are believed to be the first wake-up call for structural financial imbalances.

The deepening of the structural relationships (ratio between permanent capital / fixed capital) and debt ratios such as the direct debt ratio (given by the total debt / equity ratio), also known as the debt / equity ratio or the financial debt ratio "ratio of debt "or static financial leverage) allows you to understand the level of solvency of the company in the medium to long term. In the financial sector, the financial risk of the company's capital structure is calculated using the direct debt ratio.



How to use the Debt-Ratio ?


The KPI debt ratio is also used as an average value between two tax periods and for the calculation of the Benish Score it is called LVGI (Leverage Index) together with the following six other indicators: Days of customer credit two-year average value (Day's sales receivables Index ), the gross industrial result (Gross Margin Index), the average value of the total net assets of tangible fixed assets (Asset Quality Index), the average value of the Turnover Growth of the last two years (Sales growth Index), the average annual value of depreciation (Depreciation Index), the value of revenues net of general and administrative expenses (Sales, General and Administrative expenses) and the change in net working capital (TATA - Total Accruals to Total Assets).

In conclusion, the KPI Debt ratio is a financial dependency index that quantifies the level of debt of the company in percentage terms to cover investments and therefore indicates the overall financial exposure of the company in the medium / long term.



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