Analysing debt
In the previous chapter you saw how ratios can be used to analyse financial statements. As promised, here are some more ratios. Indicators of debt reveal information about solvency – whether a business is borrowing too much or whether it could borrow more.
Leverage (US) or gearing (UK)
Debt divided by equity
This indicates the extent to which a company is dependent on debt or equity. Analysts calculate this simple sum in various ways, which can affect comparisons. The best way is to define debt is as interest-bearing liabilities (loans) plus preference shares; and equity as ordinary shareholders funds. Also, it is better to use market values rather than book values.
Low leverage/gearing indicates a low reliance on debt – finance ...
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