Contrary to popular belief, debt is not always a bad thing to have. In fact, most investors and analysts in today’s business world search for companies that are not only successful but that utilize their debt wisely. Clients examine the debt-to-equity ratio, meaning that they measure the company’s use of debt in order to keep its business functioning and maintaining momentum. Debt-to-equity is a type of what is commonly called leverage ratios, ones that display the amount of debt owed for every dollar of equity.
It is vital to be aware of one’s debt-to-equity ratio, and even more important to monitor it consistently as well. Since it has become such a key facet in today’s society, it is definitely an efficient technique that can substantially enhance your success. If this is a new concept, one might not know where to begin, but luckily, the information and assistance available are more than plentiful.
According to Joe Knight, owner and co-founder of www.business-literacy.com and author of HBR TOOLS: Return on Investment, investors want to know the answer to this essential question: “Does the company have the ability to develop revenue, profit, and cash flow to cover expenses?” For example, if one’s debt-to-ratio rises due to late or missed interest payments, the perceived risk increases too. Debt-to-ratio analysis has proven to be a tremendous and quite accurate microcosm of the particular business’s overall functionality, efficiency, and potential for growth. It allows insight into the financial “health” of the company and its future.
Newer and smaller businesses often try to stay away from debt, but it still remains a key part of the success equation. Not only is it wise to closely monitor your own company’s debt-to-ratio activity, but it is important to track competitors’ figures as well. Keep up to date with as much information as you can, and be sure to conduct ample research. There is a plethora of information and tips available online, and you can always contact a professional for assistance. And remember, the ultimate goal for your debt-to-ratio factor is always going to be to reach an appropriate balance.