Debt Management Indicators (Debt ratios)

Coefficients showing the share of borrowed funds in the total amount of financial sources of the enterprise.

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Coefficient of financial leverage (Debt-to-equity ratio, Financial Leveraged, TD/EQ)

The coefficient of financial leverage is the ratio of total debt to equity, measures the percentage of funds provided by creditors. When calculating this coefficient, the total amount of liabilities is considered, which includes both short-term liabilities and long-term liabilities.

Financial leverage ratio = Liabilities / Equity

If the coefficient takes a value less than "1", then the company's assets are financed more at the expense of its own capital. If the leverage ratio is more than "1", then the company's assets are financed more by borrowed funds.

Valid may be the value of 2 (major public companies, this ratio may be even greater).

For large values of the coefficient, the organization loses its financial independence and its financial position becomes extremely precarious. Such organizations are more difficult to raise additional loans. The most common value of the ratio in developed economies is 1.5 (i.e., 60% debt and 40% private).

The interest coverage ratio (Times-interest-earned ratio, TIE)

The interest coverage ratio is a financial measure that measures the amount of profit before interest and loan payments (EBIT, Earnings before interest and taxes) with interest costs. The interest coverage ratio shows the possible degree of decline in the company's operating profit, under which it can service interest payments.

Interest coverage ratio = EBIT / Interest payable

Помогает оценить уровень защищённости кредиторов от невыплаты долгов со стороны заёмщика.

The normal value of indicator 3 to 4.

If the coefficient value becomes less than "1", this means that the firm does not generate sufficient cash flow from operating profit to service interest payments.

Interest coverage ratio = Profit before interest and taxes (operating profit) / Interest payable

Ratio of debt to EBITDA ratio (Debt/EBITDA ratio)

The ratio of debt to EBITDA (Total liabilities / EBITDA) is the indicator of the debt burden on the organization, its ability to repay existing liabilities (solvency). As an indicator of the receipt of funds required for the settlement of the organization's debts, in this case, EBITDA is used - profit before interest, taxes and depreciation. It is believed that from the indicators of financial results EBITDA more or less accurately characterizes the inflow of cash (the exact inflow can be learned only from the cash flow statement).

Debt / EBITDA = Total liabilities / EBITDA

The ratio of debt to EBITDA shows the solvency of the company and is often used by both management and investors, including in the valuation of listed public companies.

Under normal financial status of the organization, the value of this ratio of must not exceed 3

If the value of the coefficient exceeds 4-5, this indicates too much debt burden on the enterprise and probable problems with the repayment of their debts. For enterprises with such a high coefficient value, it is problematic to attract additional borrowed funds.

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Debt Management Indicators (Debt ratios)

Coefficient of financial leverage (Debt-to-equity ratio, Financial Leveraged, TD/EQ)

The interest coverage ratio (Times-interest-earned ratio, TIE)

Ratio of debt to EBITDA ratio (Debt/EBITDA ratio)

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