![]() Some banks use this ratio taking long-term debt, while others keep total debt. It has nothing to do with loans from the bank.” “However, those amounts are paid off as the company makes its sales. “Some types of businesses, such as distributors, need to have a lot of inventory, which adds to their debt,” says Lemieux. While for some businesses, eliminating short-term debt does not make a huge difference to the end result, for others, it is major. “By keeping only the long-term debt, it is more revealing of the company’s true debt level,” says Lemieux. So, for example, you subtract the balance on the operating line of credit and the amounts owed to suppliers from the liabilities. It’s the same calculation, except that it only includes long-term debt. What is the long-term debt-to-equity ratio? University research centres can also be a good source of information. This data is also available from some private companies. To do benchmarking, you can consult various sources to obtain the average for your business sector.īDC provides access to benchmarks by industry and firm size to its clients. Where do you find the average debt-to-equity ratio in your industry? “For example, a transport company has to borrow a lot to buy its fleet of trucks, while a service company will practically only have to buy computers,” explains Lemieux. It’s also important to note that some industries naturally require a higher debt-to-equity ratio than others. Then the company will make a profit on its investment and its ratio will tend to fall to more normal.” “If it has just invested in a major project, it is perfectly normal for its ratio to rise. “It doesn’t mean the company has a problem, but you have to look at why their debt load is so high,” says Lemieux. When the ratio is more around 5, 6 or 7, that’s a much higher level of debt, and the bank will pay attention to that. “This is a very low-debt business with a sound financial structure,” says Lemieux. This ratio tells us that for every dollar invested in the company, about 66 cents come from debt, while the other 33 cents come from the company’s equity. The company has to invest in productive resources using debt to leverage.” What is a good debt-to-equity ratio?Īlthough it varies from industry to industry, a debt-to-equity ratio of around 2 or 2.5 is generally considered good. “To get to 15%, you can’t sit on a lot of money and run the business super-prudently. “For example, minority shareholders may be dissatisfied with a 5% capital gain because they are aiming for 15%,” says Lemieux. He also notes that it is not uncommon for minority shareholders of publicly traded companies to criticize the board of directors because their overly prudent management gives them too low a return. “There is no doubt that the level of risk that shareholders can support must be respected, but it is possible that a very low ratio is a sign of overly prudent management that does not seize growth opportunities,” says Lemieux. “A very low debt-to-equity ratio can be a sign that the company is very mature and has accumulated a lot of money over the years,” says Lemieux.īut it can also be a sign of resource allocation that is not optimal. The goal for a business is not necessarily to have the lowest possible ratio. Example of a debt-to-equity ratio in a corporate balance sheet LIABILITIES Typically, the debt-to-equity ratio falls between these two extremes. “In a case like that, the lenders almost completely financed the business,” says Lemieux. On the other hand, a business could have $900,000 in debt and $100,000 in equity, so a ratio of 9. “It’s a very low-debt company that is funded largely by shareholder assets,” says Pierre Lemieux, Director, Major Accounts, BDC. Its debt-to-equity ratio is therefore 0.3. ![]() Let’s say a company has a debt of $250,000 but $750,000 in equity. Growth & Transition Capital financing solutions Kauffman Fellows Program Partial Scholarship Venture Capital Catalyst Initiative (VCCI) Industrial, Clean and Energy Technology (ICE) Venture Fund
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |