What Is Debt Load?

Debt load is the total amount of debt carried by an individual, government, or business. Publicly traded companies record their debt load on their 澳洲幸运5官方开奖结果体彩网:balance sheets, providing investors with ✅a snapshot of what they own and owe every quarter.

Understanding Debt Load

Just like regular individuals, companies use debt to make large purchases that they could not otherwise afford under normal circumstances. Corporations can usually borrow money by either taking out a loan at a bank or lending institution or by issuing 澳洲幸运5官方开奖结果体彩网:fixed-income (debt) securities such as bonds and 澳洲幸运5官方开奖结果体彩网:commercial paper.

The best way to think about the debt load a company is carrying is in relation to its assets or equity. In absolute terms, a large company is likely to be carrying a large amount of debt. But relative to its assets or equity, the debt may be small.

Different industries have different needs, too. Some companies are more 澳洲幸运5官方开奖结果体彩网:capital-intensive, requiring large amounts of money to produce goods or services. In other words, that means the "right" amount of debt, or leverage, can vary from business to business.

Advantages and Disadvantages of Debt Load

Debt tends to have negative connotations. Companies with hefty financial liabilities risk going bankrupt if business dries up, sales drop and they fail to make interest payments.

For that reason, investors are advised to closely scrutinize balance sheets. It’s important to assess if the company has sufficient 澳洲幸运5官方开奖结果体彩网:cash flows and diversified enough operations to meet obligations should it get into trouble and e🎐xperience a couple of big setbacks. It’s also wise to check if any of its borrowings contain provisions for potential early repayment.

Investors should not forget either that debt, when managed correctly, can be positive. A company that’s debt-free may be missing out on important expansion ꧒opportunities and noꦐt running at its full potential.

Moreover, debt often presents the only viable option for a company to raise capital without selling shares of company stock and ceding control and ownership. Another advantage to bear in mind is that the 澳洲幸运5官方开奖结果体彩网:principal and interest payments on borrowings c൩an be deducted from taxes as expeﷺnses.

Methods to Measure Debt Load

There are a wide range of ratios out there to help determine whether a company's debt load is too large. They include:

Debt Ratio

The simplest of these divides a company's total debt by the total assets. A low 澳洲幸运5官方开奖结果体彩网:debt ratio is usually a sign of a healthy company. But what is considered low? That depends on the size꧙ of the company and its industry. To determine whether a company's debt load is too large or about right, compare it with similarly siz෴ed companies in the same sector.

Debt to Equity Ratio

Another useful ratio is the 澳洲幸运5官方开奖结果体彩网:debt to equity ratio. To calculate this, divide the total debt by the total equity. Again, whether this figuꦏre is too large or about right depenཧds on the size of the company and the industry.

Debt Service Coverage Ratio

A company's debt load may also be assessed in relation to its income. The 澳洲幸运5官方开奖结果体彩网:debt service coverage ratio compares a company's 澳洲幸运5官方开奖结果体彩网:operating income—profit generated from normal business o꧑perations—to its debt payments.

Interest Coverage Ratio

The 澳洲幸运5官方开奖结果体彩网:interest coverage ratio determines how easily a company can pay interest on its outstanding debt by dividing its 澳洲幸运5官方开奖结果体彩网:earnings before interest and taxes൲ (EBIT) during a given period by interest payments due within the same timeframe.