Working with third party capital to drive a company’s growth is a common practice, but when mismanaged it can lead to management problems. To avoid this, it is important to keep a constant eye on the debt ratio and make sure that the financial commitment is acceptable.
Most entrepreneurs even know the full amount of their debt with financing and suppliers, but this number has no tangible significance as it does not show how much of the venture’s capital is committed. The total debt value is just one of the financial indicators to be evaluated, as is the index.
To learn more about this index, how to calculate it and interpret the data obtained, read on!
Learn how to calculate the debt ratio
To do this, one does not have to have specific skills let alone pay to obtain it. The index is a simple account whose basic numbers can easily be found on the balance sheet . Check out how to make this account uncomplicated and efficient:
With the balance in hand, find the values of current and noncurrent liabilities. They show the amount of third party capital being used in the company in the short and long term, respectively. Keep in mind also the value of the total asset.
The debt ratio is the result of dividing the sum of liabilities by asset. To get the percentage, simply multiply this number by one hundred, as follows:
IE = (CURRENT LIABILITIES + NON-CURRENT LIABILITIES) / (TOTAL ASSETS) X 100
With this formula, you get the percentage value of your company’s debt. Obviously, the bigger it is, the worse the financial situation you are in. However, there is no default value indicating a healthy debt ratio. Generally, starting at 70%, the dependence on third party capital is excessive.
Interpret the data obtained
An interesting thing about financial ratios is their ability to indicate paths and solutions. With the debt ratio is no different.
Even if the value is high, it is only a worrying number if the company’s commitment is made to cover other debts and obligations, causing the so-called snowball. Otherwise, the percentage may indicate that new investments are being made to drive growth.
Even the interest on bank financing can be negligible given the increase in revenues resulting from the expansion of the venture. That is, if your business is in this scenario, there is nothing to worry about.
When indebtedness is caused by a large number of obligations
You need to review costs and perhaps renegotiate debt to improve working capital and even analyze the balance sheet and income statement to find exactly what is hindering the performance of your debt. company.
That way you are more likely to reduce the amount of third party capital in your business, gain strength in the asset and improve your financial decision-making power, relying less on loans to keep the business strong and thriving.
It is very easy to calculate the debt ratio, isn’t it? Share this text on social networks and help other business owners calculate this index in their business!