Long Term Debt Ratio
A long-term debt ratio calculator is an online tool for calculating long-term debt to total asset ratio. We calculate long term debt ratio to get a knowledge of portion of asset financed by the way of debt. It is one of the several leverage ratios. Businesses usually calculate the long-term debt ratio each year. In normal circumstances, an entity always strives to have this ratio as low as possible. That means it wishes to have negative growth in this ratio each year. Generally, we analyze this ratio from the angles of financial leverage and bankruptcy risk.
Formula for calculating Long Term Debt Ratio
We can calculate the long-term debt ratio by dividing long-term debts by the total assets. A mathematical representation for the same is as follows:
Long Term Debt Ratio = Long Term Debt / Total Assets
About the Calculator / Features
The calculator provides a quick and correct calculation of long term debt ratio to the user by simply providing following details into it.
- Long term debt
- Total assets
How to Calculate using Calculator
The user have to insert following data into the calculator to get instant result of the calculation in a simple click.
Long Term Debt
It comprises all borrowings of the company that mature after a period of 1 year or more. Such debt are associated with an obligation to make of fixed payments at regular intervals. Long term debt helps a company to fund its capital and long-term investments. The details of these are available in the balance sheet on the liability side under the heading of non-current liabilities / secured and unsecured loans.
Assets are the resources of the company held to generate profits in the long term. These are broadly classified as current assets and non-current assets. Assets that are with the company for a period of 1 year only are the current assets. And non-current or fixed assets are held for a period of more than 1 year. The details of fixed assets will be available in the balance sheet on the Assets Side under the heading of Fixed Assets.
Example of Long Term Debt Ratio
Let us try to understand this concept with the help of an example.
A company X Ltd. has total assets worth $15,000 and long term debt of $8,500. The long term debt ratio of the company is:
Long Term Debt Ratio = 8,500 / 15,000 = 0.5667 or 56.67%
Interpretation of Long Term Debt Ratio
The ratio provides the insight about the stability and risk level of the company. Generally, a ratio less than 0.5 (that is, less than 50%) is a good indicator. In the example above, the ratio is 56.67% which is more than the ideal level. A ratio less than 50% implies that the portion of equity in financing asset is more than debt or vice versa.
We must also note that the level of debt funds and the ratio varies with the industry also. If it is a capital-intensive industry, the debt portion/ratio will be high.
One may prefer to finance the investments/assets through equity only. This will avoid the financing costs as well as the solvency issues. However, this limits the growth plans of the business. Hence, one has no option but to go for debts for financing part of its assets. Moreover, the cost of equity is more as compared to debt because of the tax-deductibility of interest on debts. So all the businesses opt for debt financing.
The major problem with long-term debt is the blockage of cash for interest and principal payments on a regular basis. Higher the long-term debts, the more the blockage of funds. A higher long-term ratio represents a high risk of insolvency. Hence, it is always advisable to adopt an optimal debt-equity mix to save on the cost of capital keeping into account the sustainability and repayment capacity.