Debt ratio

Debt ratio is also known as Debt to Assets ratio. This ratio is used to find out the long term debt of a company. If we say it in other words, this ratio is used to determine that How much percentage of the total asset is financed by debt

  • This ratio is represented in decimal or percentage
  • It tells the position of the company which is financed by debt.

Formula

The ratio of total debt and total assets of a company is called debt ratio.

Debt to assets ratio = (Short term debt + Long term debt) / Total assets

Total assets = Current assets + long term assets

If you do not know about current assets, current liabilities, inventory, market security, etc. then you see the first post of the liquidity ratio which will help you in understanding the solvency ratio. Click on the link below to see the first post of the liquidity ratio

To get financial data of any Indian company, first of all, you can go to the website of moneycontrol.com and get all the data in the balance sheet section.

Example of Debt ratio

Let’s take a look at a simplified example of a company that you can consider as an investment.

We are taking the example of a BHEL a company whose financial data you can find in the balance sheet section on the website named Moneycontrol.com

Company’s BriefsReults in Cr. (INR)
Short-term debt
Long-term debt
22,647.41
9,442.80
Total assets61,271.42

Using these data and the given formula, you can calculate the debt ratio of the company BHEL company.

Debt ratio of BHEL company = (22647.41 + 9442.80) / 61271.42 = 0.5237 = 52.37%

You saw in the above example that BHEL company has a debt ratio of 52%, this implies that 52% of the total assets of the BHEL company are financed from debt.

Debt to asset ratio analysis

The debt to asset ratio can tell us how dependent a company is on debt. Some businesses use leverage as a strategy to earn more risk and promote resources by using borrowed money while reducing more risks. A company’s debt ratio will be too high or too low, depending on the industry. Does what it operates. Stable cash flow companies such as pipelines or utility companies have a higher debt ratio on average. In contrast, technology companies with more volatile cash flows have lower debt ratios.

Leverage measurement ratios such as debt ratios are often used by lenders and investors to indicate how financially secure a company is. A low debt to asset ratio is an indication that the company is managing its risks wisely. It will be able to pay its debts due on time. A low debt ratio will also reduce the likelihood of bankruptcy or pay the business incapacity as a result of paying a legal loan with its lenders. In addition, a low debt ratio also serves as a preventative measure in the case when lenders decide their interests. Download Report

An extremely low debt ratio compared to competitors in the same industry – does not always indicate that the company is effectively managing its business. A very low debt ratio actually means less risk involved. However, the company is short of funds, which could potentially hinder its growth. The company may struggle to run its business activity effectively and achieve lower returns as a result. To get the maximum profit, investors should look for a good company.

Conclusion

  • The lower the debt to asset ratio of any company, the lower the financial risk of that company because the company will have fewer liabilities.
  • When a company has a debt to asset ratio of 0%, it means that the company’s total assets are financed by investors and promoters.
  • When the debt ratio of a company is 100%, it means that the total assets of the company are financed by debt which can put the company in financial risk in the future.

Note

If you need a Damat account or trading account to invest in the share market and mutual funds, you can open it by clicking on the link given below.

Do not forget to subscribe to our Telegram channel if you prefer to invest in the stock market and mutual funds

Thank you for reading our post, God bless you all

If you like our post, Then share it with your friends and family.

Leave a Comment