The long-term debt to equity ratio can tell you how much debt a company is using to finance its operations. If this number is too high it may signify future liquidity problems. If this number is too low it can signify inefficient use of the financing alternatives available to a company.
This ratio is calculated by taking the long-term debt of a company and dividing it by the shareholders’ equity. Be sure to include the company’s lease obligations (which can be found in detail in the footnotes of an annual report) when calculating long-term debt.
Start up companies which have access to the debt markets, often have higher ratios than more established companies. In addition, the amount of debt a company can safely issue varies by industry. For example, companies with large manufacturing facilities often have more long-term debt than companies that provide services or software. Therefore, it is useful to look at the ratios of numerous companies in the same industry before drawing any conclusions.
Be the first to comment on "Long-term Debt to Equity"