A corporation with a high debt ratio is likely heavily indebted and may have taken on more debt than it can comfortably repay. Debt ratios are used by accountants and investors to gauge the likelihood that a firm would fail to fulfill its obligations.
Are high debt ratios beneficial?
- Purely from a risk standpoint, debt ratios of 0.4 or less are preferred, whereas a debt ratio of 0.6 or more makes borrowing money more challenging. While a low debt ratio signals a corporation is more creditworthy, holding too little debt carries danger as well.
- Analysts, investors, and creditors frequently use the debt to asset ratio to assess a company's overall risk. Higher ratios indicate more indebted businesses that are riskier to invest in or lend money to. A potential future default could be indicated if the ratio keeps rising.
- A debt to equity ratio of 1.5, for instance, indicates that a corporation utilizes $1.50 in debt for every $1 in equity, or 150% of equity. When the ratio is 1, creditors and investors each contribute equally to the company's assets.
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