leverage boosts earnings by more than the debts cost (interest) Share prices may fall if the cost of debt financing surpasses the higher income generated The cost of debt can fluctuate depending on m.
Trang 1leverage boosts earnings by more than the debt's cost (interest) Share prices may fall if the cost of debt financing surpasses the higher income generated The cost of debt can fluctuate depending on market conditions As a result, unproductive borrowing may
go undetected at first
Because long-term debt and assets are larger accounts than short-term debt and short-term assets, changes in them have the biggest influence on the D/E ratio Other measures can be used by investors to assess a company's short-term leverage and its capacity to fulfill debt commitments due in a year or less
The Cash Ratio, for example, is used by an investor to measure a company's short-term liquidity or solvency:
Or the Current Ratio:
instead of a long-term measure of leverage such as the D/E ratio
Because the D/E ratio has some limits, it is essential to examine the industry in which the firm works while employing it Because various businesses have varying capital demands and growth rates, a high D/E ratio in one area may be frequent, while a low D/E ratio in another may be typical
When compared to market averages, utility companies frequently have an extremely high D/E ratio A utility develops slowly, but it can generally maintain a consistent cash stream, allowing it to borrow extremely inexpensively In slow-growth businesses with consistent income, high leverage ratios imply an effective use of capital Because these firms can borrow cheaply and have a generally consistent revenue, the consumer staples or consumer non-cyclical sector also has a high D/E ratio