long term debt ratio

long term debt ratio

Long-Term Debt-Paying Ability and Debt Ratio Analysis

General understanding of financial sustainability

For a firm being financially sustainable means being able to carry its debt. Usually, the debt ratio analysis is being applied to a company by potential creditors to see, how creditworthy it is and analyze its willingness and ability to pay the debt. Generally, greater amount of company’s debt means greater financial risk of its bankruptcy. Long-term debt paying ability of a firm can be viewed as indicated by the income statement and by the balance sheet.

Debt ratio calculation and analysis

The indicator of the firm’s long-term debt paying ability from the income statement view is the times interest earned ratio. Having normal times interest earned ratio means lesser risk for a firm not to meet its interest obligation. If this ratio is being relatively high and stable over the years, a company is financially sustainable, while relatively low and fluctuating ratio would mean potential problems with paying the long-term obligations.

Times Interest Earned = Recurring Earnings, Excluding Interest Expense, Tax Expense, Equity Earnings, and Noncontrolling Interest ÷ Interest Expense, Including Capitalized Interest

As seen from the formula, times interest earned ratio measures the amount of income that can be used to cover interest expenses in the future. In opposition to percentage, this ratio is expressed in numbers, and it measures how many times a firm could cover the interest expense with its income, so larger ratios are considered more desirable than smaller ones. Another formula for times interest earned calculation is as follows:

Times Interest Earned = EBIT ÷ Interest Expense

Earnings Before Interest and Taxes (EBIT) is also referred as operating profit, and it measures firm's profit that excludes interest and income tax expenses. Considering this, times interest earned ratio can also be calculated as follows:

Times Interest Earned = Operating profit ÷ Interest expense

The debt ratio is an indicator of firm’s long-term debt-paying ability. It is a ratio of firm’s total liabilities to its total assets. Use the following formula to calculate the debt ratio:

Debt Ratio = (Total Liabilities ÷ Total Assets) = (Total Assets - Total Equity) ÷ Total Assets

The debt ratio shows how well creditors are protected in case of company’s insolvency by indicating the percentage of firm’s assets financed by creditors. Issuing the additional long-term debt is inappropriate for a company if its already existing creditors are not well protected. In terms of financial sustainability of a business lower ratios are more favorable. Another ratio that allows to measure firm’s long-term debt paying ability is long-term debt ratio:

Long-Term Debt Ratio = Long-Term Debt ÷ Total Assets

As seen from the formula, this ratio measures the percentage of a company’s total assets financed with long-term debt, including loans and financial obligations that last more than one year. This ratio comparison made for different periods of time would show whether a company is becoming more or less dependent on debt to run a business.

The Long-Term Debt to Total Capitalization Ratio

The long-term debt to total capitalization ratio is a ratio showing the financial leverage of a firm by dividing the long-term debt by the amount of capital available:

The Long-Term Debt to Total Capitalization Ratio = Long-Term Debt ÷ (Long-Term Debt + Preferred Equity + Common Equity)

This ratio is fully comparable between different companies, and that's why it is useful for investors, who can measure their risks with different firms by comparing their long-term debt to total capitalization ratios and identifying the amount of financial leverage, utilized by these firms. The decrease of the long-term debt to total capitalization ratio over time would indicate the lessening long-term debt load of the company as compared to the total capitalization, leaving a larger percentage of the total capitalization to the total stockholder’s equity, and vice versa.

Another ratio helping the creditors understand how well they are protected in case of firm’s insolvency is the debt to equity ratio. It’s a ratio that compares the total debt with the total shareholders’ equity:

Debt to Equity Ratio = Total Liabilities ÷ Shareholders’ Equity

If a company’s debt to equity ratio is high, it has been financing its growth with debt. This is being done to generate more earnings than it would have been without this outside financing. In terms of long-term debt-paying ability the lower this ratio is, the better. Normal values for the debt to equity ratio are different for different industries. Close to this indicator is long-term debt to equity, comparing only long-term debt with the stockholders’ equity:

Long-Term Debt to Equity = The Long-Term Debt ÷ (Preferred Equity + Common Equity)

The higher the long-term debt to equity ratio is, the greater a company’s leverage is. Most commonly higher long-term debt to equity ratio of a firm would mean more risk for the investor.

Debt to Tangible Net Worth Ratio

More conservative measure for a firm’s long-term debt-paying ability is debt to tangible net worth ratio. It indicates creditors’ protection level in case of firm’s insolvency by comparing its total liabilities with shareholders’ equity excluding intangible assets, such as trademarks, patents, copyrights, etc.:

Debt to Tangible Net Worth Ratio = Total Liabilities ÷ (Shareholders’ Equity - Intangible Assets)

Debt to tangible net worth ratio is a measure of the physical worth of a firm, not including any value derived from intangible assets. As with the debt ratio and the debt to equity ratio, from the perspective of long-term debt-paying ability having lower ratio is preferable for a firm.

In addition to the profitability of the firm, applying the debt ratio analysis to it is a good way for an investor to estimate firm’s performance and measure the risk. Calculation of debt ratios would clarify the ability of a firm to carry its debt in the long run. Debt ratio analysis includes calculation of the following ratios:

Times Interest Earned = Recurring Earnings, Excluding Interest Expense, Tax Expense, Equity Earnings, and Noncontrolling Interest ÷ Interest Expense, Including Capitalized Interest

Debt Ratio = (Total Liabilities ÷ Total Assets) = (Total Assets - Total Equity) ÷ Total Assets

Long-Term Debt Ratio = Long-Term Debt ÷ Total Assets

The Long-Term Debt to Total Capitalization Ratio = Long-Term Debt ÷ (Long-Term Debt + Preferred Equity + Common Equity)

Debt to Equity Ratio = Total Liabilities ÷ Shareholders’ Equity

Debt to Tangible Net Worth Ratio = Total Liabilities ÷ (Shareholders’ Equity - Intangible Assets)

Long Term Debt to Total Asset Ratio

Definition of Long Term Debt to Total Asset Ratio

Long Term Debt to Total Asset Ratio is the ratio that represents the financial position of the company and the company’s ability to meet all its financial requirements. It shows the percentage of a company’s assets that are financed with loans and other financial obligations that last over a year. As this ratio is calculated yearly, decrease in the ratio would denote that the company is fairing well, and is less dependant on debts for their business needs.

Formula for Long Term Debt to Total Assets Ratio

The formula to ascertain Long Term Debt to Total Assets Ratio is as follows:

Long Term debt to Total Assets Ratio = Long Term Debt / Total Assets

For Example, a company has total assets worth $15,000 and $3000 as long term debt then the long term debt to total asset ratio would be

This means that the company has $0.2 as a long term debt for every dollar it has in assets.

The higher the level of long term debt, the more important it is for a company to have positive revenue and steady cash flow. It is very helpful for management to check its debt structure and determine its debt capacity. It also shows how many assets of your company are finances with the help of debts. To calculate long term debt to total assets ratio you need to add together your current liabilities and long term debts and sum up the current and fixed assets and divide both the total liabilities and the total asset to get an output in percentage form.

The output is the assets that are financed by the debt financing while the other half is financed by the investors in your firm. Having the long term debt to total asset ratio as a high percentage should be worrying factor for the firm and the company should look in to it and determine the reason of the high percentage and try to minimize it as much as possible. The high value would mean that your company needs to have a good cash inflow to meet all the expenses.

Long Term Debt to Total Asset Ratio therefore provides a measurement to the investor regarding the percentage of a company’s assets which are financed with the help of loans or debts for a period lasting over a year.

Long Term Debt to Total Asset Ratio

The long-term debt to total asset ratio is a solvency or coverage ratio that calculates a company’s leverage by comparing total debt to assets. In other words, it measures the percentage of assets that a business would need to liquidate to pay off its long-term debt.

A company can have two types of liabilities on its balance sheet: Short-term (due within 1 year) and long-term (due in more than 1 year). Long-term debt ratio is a ratio which compares the amount of long-term debt to the value of total assets on the books of a company. In other words, it gives a sense of financial leverage of a company.

Definition: What is the Long Term Debt Ratio?

A company can build assets by raising debt or equity capital. The ratio of long-term debt to total assets provides a sense of what percentage of the total assets is financed via long-term debt. A higher percentage ratio means that the company is more leveraged and owns less of the assets on balance sheet. In other words, it would need to sell more assets to eliminate its debt in the event of a bankruptcy. The company would also have to generate strong revenue and cash flow for a long period in the future to be able to repay the debt.

This ratio provides a sense of financial stability and overall riskiness of a company. Investors are wary of a high ratio, as it signifies management has less free cash flow and less ability to finance new operations. Management typically uses this financial metric to determine the amount of debt the company can sustain and manage the overall capital structure of the firm.

Let’s look at how to calculate the long-term debt ratio.

Long-term debt to assets ratio formula is calculated by dividing long term debt by total assets.

Long Term debt to Total Assets Ratio = Long Term Debt / Total Assets

As you can see, this is a pretty simple formula. Both long-term debt and total assets are reported on the balance sheet.

Total Assets refers all resources reported on the assets section of the balance sheet: both tangible and intangible.

Long-term debt refers to the liabilities which are due more than 1 year from the current time period

One thing to note is that companies commonly split up the current portion of long-term debt and the portion of debt that is due in 12 or more months. For this long-term debt ratio equation, we use the total long-term debt of the company. This means that we add the current and long-term portions of long-term debt.

Now that you understand how to calculate the LT Debt to Assets equation, let’s look at some examples.

Let’s look at an example of Tim’s Tool Co. Tim’s financial data from his balance sheet is shown below and the ratio is calculated for the past three years. As you can see, Tim’s assets are increasing faster than his total debt. Thus, the ratio has decreased in the last three years.

Now, let’s take a look at an example of two different US based utility companies: Southern Co. and Duke Energy. We calculated the Long-term debt ratio using the SEC 10K. Here are the results:

As we can see from the numbers, the LT debt ratio has been generally over 0.6x for both the companies during 2014-16 period. This could imply that the company has been funding its assets and expansion largely from debt (more on this in the interpretation section below).

Let’s analyze and interpret the ratio and see what key information about the financial health of the companies we can extract.

Typically, a LT debt ratio of less than 0.5 is considered good or healthy. It’s important to analyze all ratios in the context of the company’s industry averages and its past. For capital intensive industry the ratio might be higher while for IT software companies which are sitting on huge cash piles, this ratio might be zero (i.e. no Long-term debt on the books).

In the Tim’s Tile Co. example above, I mentioned that the ratio was decreasing even when the debt was increasing. This could imply that Tim’s Tile Co. is creating value accretive assets (thus assets are surpassing the debt increase) or using other means of funding growth.

In the Duke and Southern Utility example, we can see that Duke reduced its LT debt ratio while Southern increased its. Looking at the numbers closer, we see that Southern has been adding debt to its books (organically or by acquiring companies) to grow its operations. If this strategy works, it could create long-term value for investors. Normally, lower the ratio better it is. But that is not the absolute truth.

LT debt ratio provides a theoretical data point and can act as a discussion starter. Analyst need to understand the underlying causes of the ratio changes. For risk adverse investors a low LT debt ratio is preferable while investors with high-risk appetite may tolerate higher financial leverage. The choice of the level of ratio will also depend on the industry and the industry cycle. For example, in the oil & gas industry during the recent oil price decline (2014-16) many smaller companies with high level of debt were more severely penalized than the stable large integrated Oil & Gas companies. In bear market (or risk-off environment) investors prefer companies with lower debt levels while in bull-market (or risk-on environment) geared companies are favored as they can provide higher earnings growth. Analysts need to be cognizant of all these factors while analyzing a company.

Analyst should also understand the ideal capital structure that management is seeking. Suppose the management has guided towards a LT debt ratio of 0.5x in next 5 years as part of achieving its optimal capital structure, than analyst should track the movement of the ratio in the next five years to gauge the execution capability of the management. Analyst could also forecast the financial statements 5 years out, to predict if the desired capital structure (as measured by LT debt ratio) is achievable or not.

For instance, management might strive for an aggressive target simply to spur investor interest. Analysts must be aware of what the company is doing without being tricked with short-term strategies. That’s why it’s so important to review the management discussion section of a 10-K of the quarterly earnings reports.

Lenders, on the other hand, typically set covenants in place to prevent companies from borrowing too much and being over leveraged. LT term debt ratio is one such commonly used covenant in which the lender will restrict the ratio to rise above certain value. The loan terms also explain how flexible the company can be with the covenants. These rules force management to be disciplined because if the debt covenants are broken, the company will have to repay the loans immediately. This could cause a negative financial or reputational impact such as fines, foreclosures or credit downgrades.

Practical Usage Explanation: Cautions and Limitations

As with any balance sheet ratio, you need to be cautious about using long debt to value a company, specifically for the total assets in the calculation. The balance sheet presents the total asset value based on their book values. This can be significantly different compared with their replacement value or the liquidation value.

The ratio doesn’t consider several debt obligations such as ‘short-term debt’. A company might be at immediate risk of a large debt falling due in next 1 year, which is not captured in the long-term debt ratio.

It’s also important to look at off-balance sheet items like operating lease and pension obligations. These items are not presented in the long-term liabilities section of the balance sheet, but they are liabilities nonetheless. If you don’t include these in your calculation, your estimates will not be completely correct.

Keep in mind that this ratio should be used with several other leverage ratios in order to get a proper understanding of the financial riskiness of a company. Some of other relevant ratios that you can use are the Total debt to total assets ratio, Total debt to Equity ratio, and the LT debt to Equity ratio.

That’s how you can use the LT-debt ratio to measure a company’s financial leverage and calculate its overall risk. Used properly while considering all the loopholes, this metric can be an important tool to initiate constructive discussion with the management about the future of the company.

фр. ratio d'endettement à long terme

исп. coeficiente de endeudamiento a largo plazo

показатель долгосрочной задолженности

Отношение долгосрочной задолженности к активам.

Финансы и долги. — М.: Весь мир . 1997 .

Смотреть что такое "long-term debt ratio" в других словарях:

Long-term debt ratio — The ratio of long term debt to total capitalization. The New York Times Financial Glossary … Financial and business terms

long-term debt ratio — The ratio of long term debt to total capitalization . Bloomberg Financial Dictionary … Financial and business terms

Long Term Debt To Total Assets Ratio — A measurement representing the percentage of a corporation s assets that are financed with loans and financial obligations lasting more than one year. The ratio provides a general measure of the financial position of a company, including its… … Investment dictionary

Long-Term Debt To Capitalization Ratio — A ratio showing the financial leverage of a firm, calculated by dividing long term debt by the amount of capital available: A variation of the traditional debt to equity ratio, this value computes the proportion of a company s long term debt… … Investment dictionary

Long-term debt to equity ratio — A capitalization ratio comparing long term debt to shareholders equity. The New York Times Financial Glossary … Financial and business terms

long-term debt-to-equity ratio — A capitalization ratio comparing long term debt to shareholders equity. Bloomberg Financial Dictionary … Financial and business terms

debt ratio — Amount of long term debt divided by total of company s capital. See also debt equity ratio … Black's law dictionary

debt ratio — Amount of long term debt divided by total of company s capital. See also debt equity ratio … Black's law dictionary

Debt ratio — is a financial ratio that indicates the percentage of a company s assets that are provided via debt. It is the ratio of total debt (the sum of current liabilities and long term liabilities) and total assets (the sum of current assets, fixed… … Wikipedia

Debt-to-equity ratio — The debt to equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders equity and debt used to finance a company s assets.[1] Closely related to leveraging, the ratio is also known as Risk, Gearing or Leverage. The … Wikipedia

Debt/equity ratio — Indicator of financial leverage. Compares assets provided by creditors to assets provided by shareholders. Determined by dividing long term debt by common stockholder equity. The New York Times Financial Glossary * * * A ratio that measures a… … Financial and business terms

This is an in-depth guide on how to calculate Long Term Debt Ratio with detailed interpretation, analysis, and example. You will learn how to utilize its formula to evaluate a firm's long-term debt position.

Definition - What is Long-term Debt Ratio?

The long-term debt ratio , often known as the long-term debt to total asset ratio, essentially measures the total amount of long term debt in relation to the total assets of a company.

This is a fundamental figure you will want to know because balance is key here.

A company that takes on comparatively more debt than it can handle is not in a very good position to meet all of its responsibilities.

You can learn more about how to calculate and interpret it below.​

The formula for the long term debt to total asset ratio is pretty much what you would expect it to be.

You simply divide a company’s total long term debt by its total assets. So the formula looks like this:

Long-term Debt Ratio = Long-term Debt / Total Assets

Both of these figures can be found on a company’s financial statements so if you want to do the math yourself, you definitely can.

Imagine that Company X currently has $1,750,000 in total assets. The company’s long term debt currently stands at $1,380,000.

To calculate the long term debt ratio, then, we would use the following equation:

This gives us a long term debt to total assets ratio of 0.79. In other words, for every dollar of assets, the company has 79 cents of long term debt.

A company with a 0.79 long term debt ratio has a pretty high burden of debt. It’s better than having a number above 1, however, because that would mean it had more long term debt than it did assets.

A high long term debt ratio means a high risk of not being able to meet its financial obligations.

Even 0.79 is not really ideal from a shareholder’s standpoint.

A company that has a lot of debt is not in the best position to pay out dividends.

While this ratio is not necessarily a sign to cut and run, you generally want to look for ratios below 0.50 if you’re looking to minimize risk and invest more conservatively.

If Company X is a relatively new business, this may not be a red flag at all.

The company could still be in the process of growing enough to reach a more stable long term debt ratio.

In this case, what you would want to check is the year over year change to that ratio.

Is it getting higher or lower?

If Company X is steadily chipping away at their debt, you can reasonably assume that they will soon reach a more attractive financial position.​

The most important thing to remember is that long term debt does not account for all debt.

Long term debt includes things like mortgages and securities.

But companies also have short term debt obligations like rent and utilities.

Paying off these short term obligations could interfere with their ability to meet their long term obligations so you can’t afford to ignore them.

This ratio is a good predictor of their long term burden.

You’ll need to get the total debt to total assets ratio in order to see the bigger picture of how the company is doing right now.​

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