Safety Ratio

Debt to Equity Ratio Safety refers to how well you business can survive unfavorable situations - usually situations outside the control of the business owner - like economic slowdowns or industry downturns - calculated by the debt-to-equity ratio. The more equity a business has in comparison to debt it has taken (obligations to creditors) the stronger the business should it face an industry, market or economic slowdown.
  • Total Liabilities:    What are total liabilities?
  • Equity:    What is business equity?
    Interpret Your Results
  • The higher the ratio - the more risk to the business as it is relying more on debt to finance the operations than equity (either equity injected into the business or generated by the business from profits).
  • This ratio usually ranges between 1.50 to 2.00 - a 2.00 ratio shows the business has twice as much debt as it does in equity - essentially giving creditors twice as much control over the business than founders or owners.
  • This ratio may be higher for debt intensive industries
  • Click Here - to see possible ways to improve this ratio
  • Debt to Equity
    Ratio:

  •  
  •  
Ways to Improve: Debt to Equity Ratio: The most obvious way to improve this ratio and better position your business to survive any potential slowdown - either from the business itself or from outside influences - is to increase equity or lower debt or both. This could be done by:

  • Using cash reserves or some means to pay down any debt (long- or short-term).
  • Increase assets - without taking on debt to pay for them. This could be generating more cash in the business, more accounts receivables, more inventory or any fixed assets that does not have to be financed with additional debt - as equity is what is left over after you subtract out liabilities from assets.
  • Increase equity into the business - by either placing more cash in the business (without obligation to that cash like debt), selling off unnecessary assets like plant, property or equipment, dispose of unprofitable operations or increase profits that are retained in the business.
  • Profits can be increased by raising prices (as long as prices remain competitive), adding additional, profitable products and services or finding efficiencies in production or service or within the entire business - reducing expenses.
The goal is simple - to reduce debt in relation to equity in the business. Thus the business, should it face an adverse situation, not be straddled with enlarged debt payments - payments greater than revenue or profits generated.

- Back to Debt to Equity Ratio -

Other financial ratio calculations you may want to evaluate:

Disclaimer: These ratios are for education purposes only and are in no way an adequate substitute for a professional financial advisor.

Copyright 2007 - 2010 - Business Money Today - All rights reserved
Financial Ratios - Safety