When it comes to being in debt, no one likes that, especially companies, where “profit” is the most used word. They may put you in a tough situation but mastering your financial skills can mean the difference between being bankrupt and being successful. The long-term debt to total assets ratio of a business reveals the number of assets (in the form of a percentage) financed through long term debts. Basically, this ratio shows the overall financial status of a firm.
A long-term debt refers to a debt longer than a year, while the short-term debt is less than a year. With the obvious being stated, let’s see the formula of this ratio.
The Formula of Long-Term Debt to Assets
You won’t need to be a financial virtuoso to get this straight. The formula is simply dividing the long-term debt to the total assets. As already stated, the long-term debt represents a business’s financial obligations for more than one year. The total assets refer to all items of economic value.
Before engaging in calculating the long-term debt, be sure to separate the long term from the short term, or else you will get a big ratio. Speaking of big ratios, having a lower long-term debt ratio means that the company is going smooth and does not depend on debt and money from the outside.
Understanding the Ratio
A bigger ratio means that the company is basically depending on money from the outside. Also, a bigger ratio means that less cash will flow through the company and new operations will be tough to finance. A good countermeasure for this is to increase the revenue strain to pay the expenses. Also, building assets means that the debt and the equity capital increase as well. When dealing with bankruptcy, the company will need to sell assets to get rid of the debts.
Although the long-term debts are the most important, short-term debt must not be left behind. These could come up from behind and you’ll never know what hit you.
Also, the ratio is used to see how your company stands next to other companies with the same activity domain. Calculating the long-term debt ratio once a year is life-saving. Some companies may calculate the ratio even more often than that. This may give them the birds-eye view over the entire debt of the company. Although the calculations are not lying, there might be some things that you missed along the way. So, for the calculations to be exact and spot on, all the progress and calculation sheets must be studied thoroughly.
As a conclusion, making the calculations will probably save you from unwanted scenarios. Also, the calculation of long-term debts will give you a view of all the risks you may encounter along the way. When used properly, this calculation will inform you about the overall risk that the company is facing. This way, you can prevent it and bring your company to the top, where it belongs.