Business planning. Capital structure indicators (most important)

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Business planning. Capital structure indicators (most important)

Lecture notes, cheat sheets

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43. INDICATORS OF CAPITAL STRUCTURE

Capital structure indicators (Gearing ratios), also called solvency indicators, characterize the ability of an enterprise to repay long-term obligations while maintaining its long-term assets. A sufficient level of solvency of the enterprise ensures its protection from bankruptcy. To calculate the indicators of this group, the average values of balance sheet data for the period are used.

Amount of liabilities to assets (total debt to total assets) shows what proportion of the company's assets is financed by borrowed funds, regardless of the source, and is equal to the ratio of the sum of long-term and current liabilities to total assets: Total liabilities by assets = (Long-term liabilities + Current liabilities) / Total assets.

The ratio of long-term liabilities to assets (Long-term debt to total assets) shows what proportion of the company's assets is financed by long-term loans:

Long-term liabilities to assets = Long-term liabilities / Total assets.

Financial independence ratio (total debt to equity), or owner’s quota, characterizes the firm’s dependence on external loans and is equal to the ratio of the sum of long-term and current liabilities to equity: Financial independence = (Current liabilities + Long-term liabilities) / Own capital.

The higher the value of the coefficient, the greater the amount of the company's accounts payable, the higher the risk of insolvency. A high value of the coefficient indicates the potential danger of the enterprise having a shortage of funds. To interpret this indicator, it is necessary to take into account its average level in other industries, as well as the company's access to additional sources of financing.

Interest coverage ratio or creditor protection ratio {times interest earned) characterizes the degree of protection of creditors from non-payment of interest on a loan and shows how many times during the reporting period the company earned funds to pay interest on loans. It is equal to the ratio of profit before interest and income tax to the interest on the loan.

Interest coverage = Operating profit / Loan interest amount.

This indicator also allows you to determine the acceptable level of reduction in profits used for interest payments.

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