What Do Debt Management Ratios Measure?
Debt management ratios measure someone’s financial condition. They show the ratio of a company’s debt to its total financing. Usually, banks and other lending institutions turn to debt management ratios analysis to estimate borrower’s creditworthiness and suitability for a loan. It refers not only to large firms and to corporations. Lenders use debt management ratios when they work with individuals also.
Debt management ratios show the extent to which a firm’s managers are attempting to magnify returns on owners’ capital with financial leverage.
Debt management ratios are a sort of indicator of the individual’s financial health. The formula for evaluating a debt management ratio looks like:
Debt Ratio = (Total Debt) / (Total Assets)
It helps to show a number of company’s assets financed through debt. A higher value of a debt ratio shows increased liquidity of the company. It means that a company manages to fulfill its current obligations through its liquid assets.
Still, each lender has its own guidelines when it comes to calculating the debt management ratio. Certain factors affect the result: amount, a length of the repayment period, type of the loan (secured or unsecured). Therefore, you should ask your lender about certain details beforehand.