Debt ratio

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The leverage ratio ( English gearing ratio ) is a financial ratio that the percentage ratio between debt and total assets of a company indicating. The complementary term is the equity ratio .

General

In practice, the term “debt ratio” is sometimes used as a synonym for “leverage”. In business literature , however, the level of indebtedness is usually understood to be a separate key figure (namely debt in relation to equity).

The debt capital ratio - also known as the tension coefficient or degree of tension - is the most important vertical balance sheet indicator alongside the equity ratio, which provides information about the capital structure of a company . It serves as the basis for financing decisions in the company itself. She is also interested in external competitors , credit institutions , other creditors , rating agencies and partners ( shareholders ). You have an interest in being able to measure your creditworthiness at any time. This requires transparency of the economic situation ( annual financial statements ) in order to be able to obtain information about the credit risk from these documents .

detection

As part of the annual financial statement analysis ( municipal annual financial statement analysis), the debt capital ratio is part of the financial analysis and there the financing analysis. In the case of ratios such as the debt capital ratio, balance sheet items are compared, specifically the actual debt capital and the balance sheet total (total capital). To determine the debt ratio, it is first necessary to identify the balance sheet items belonging to the debt. To this end, debt positions are to be examined for their debt capital character. The formula for the determination is:

.

Differentiation from equity

The - not always easy - distinction between equity and debt capital is of major importance for analysts . If there is only the slightest possibility of repayment, the corresponding balance sheet item belongs to debt. Therefore, all types of provisions form part of the debt, since there is at least a 50% repayment probability. A return on mezzanine capital that is not dependent on success also speaks in favor of outside capital.

Debt positions

Formal debt capital is the components listed in Section 266 (3) HGB under items B and C on the liabilities side of a balance sheet . These are:

Business evaluation

Viewed in isolation, the level of the borrowed capital ratio determined has little informative value. It depends on criteria such as branch of industry , business purpose , business size and legal form whether a company has an adequate debt capital ratio.

“Appropriate” debt capital

There are no clear business principles that could provide benchmarks for a company's capitalization based on its purpose and size. There are also no general rules about the ratio of equity to debt.

The complementary “adequate equity” is an indefinite legal term that relates a company's own funds to its total assets. In any case, in terms of tax law, equity is considered appropriate that is comparable with the capital structure of similar companies in the private sector in the relevant period. According to the 2004 corporate income tax guidelines, adequate equity capital is generally given “if the equity capital is at least 30% of the assets”, ie the debt capital does not exceed 70% of the assets . For taxation purposes, the asset coverage ratio is assumed and the equity is classified as appropriate if the asset coverage ratio (I) is 30% and thus 70% of the fixed assets are to be financed by debt.

Leverage ratio criteria

  • The average level of the debt capital ratio is strongly industry-dependent. So have banks typically have a relatively high debt ratio of usually about 85%. In the case of plant-intensive manufacturing companies, on the other hand, the debt capital ratio is relatively low on average. A rule of thumb often mentioned is that for non-banks the equity ratio should be at least 20%, i.e. H. the debt ratio does not exceed 80%.
  • Company size : Large companies tend to have a lower debt capital ratio than small companies. The debt capital ratio and company size seem to correlate positively, because the smaller the companies examined, the higher the ratio.
  • Legal form : Partnerships have relatively high borrowed capital ratios, as at least one person with full liability has unlimited liability with his / her private assets - which are not shown in the balance sheet. Corporations, on the other hand, have lower leverage ratios because they often belong to the asset-intensive industries.

Business consequences

The debt capital ratio is an important indicator for the creditworthiness of a company.

A high debt capital ratio means a high level of dependency on creditors and the associated high interest payments and repayments . This leads to unfavorable debt ratios such as the debt service coverage ratio . A low debt capital ratio is usually accompanied by a low interest coverage ratio , because debts trigger interest and repayment payments that have to be financed from the sales process. A high debt capital ratio, on the other hand, increases the earnings risks because of the high debt servicing, because more profits are used for interest expenses and thus the break-even point rises with increasing debt ( cost leverage ). As a result, a high debt capital ratio brings employment risks with it. In addition, a high debt capital ratio helps increase future liquidity and refinancing risks .

A low debt capital ratio is associated with a high capacity to bear the losses incurred , so that such companies are less susceptible to crises and the risk of default for creditors is reduced. Companies with high equity capital can absorb losses over a longer period of time from their equity and are more insolvency-resistant than undercapitalized companies, which in extreme cases can threaten over-indebtedness . Low debt ratios signal to creditors that the company's shareholders are ready to bear the investment risk themselves.

From the perspective of financial leverage , however, a high debt capital ratio leads to a high return on equity ( leverage effect ). This is one of the few positive effects of a high leverage ratio. As long as the interest on debt is lower than the return on total capital due to a low debt ratio, the return on equity can be increased with a rising debt ratio and vice versa. A high debt capital ratio can be a crisis indicator, since the difficulties associated with it, "such as bridging liquidity bottlenecks, obtaining bank loans and making necessary investments, significantly increase the risk [...] of getting into a crisis situation or even to be faced with bankruptcy ”.

Other comparable key figures

Individual evidence

  1. ↑ Peter Krahé / Frank Stolze: Basic knowledge of business administration . Books on demand GmbH, Norderstedt 2006, p. 125 .
  2. ^ Klaus Deimel / Thomas Heupel / Kai Wiltinger: Controlling . Vahle, Munich 2013, p. 189 .
  3. ^ Elisabeth Mehrmann: Controlling in Practice . Gabler, Wiesbaden 2004, ISBN 3-409-12590-6 , pp. 140 .
  4. ^ Jan Wilhelm, Corporation Law , 2009, p. 188 f.
  5. ↑ Joachim Jickeli / Dieter Reuter, memorial for Jürgen Sonnenschein , 2003, p. 667
  6. ↑ BFH judgments of September 1, 1982 BStBl. 1983 II, p. 147 and of July 9, 2003 BStBl. 2004 II, p. 425
  7. ↑ Corporate Income Tax Guidelines 2004, R 33 para. 2 sentence 3 KStR
  8. ↑ Oliver Everling / Karl-Heinz Goedemeyer, bank rating: credit institutions on the test stand , 2004, p. 69
  9. ↑ Bettina Greimel-Fuhrmann, Gerhard Geissler, Gabriele André, Elisabeth Schleicher Gálffy, Stefan Grbenic: Business Administration HAK III . Manz, Vienna 2016, p. 247 f .
  10. ↑ Michael Reuter, equity disclosure in the IFRS financial statements , 2008, p. 164
  11. ↑ Werner Pepels, Expert Practice Lexicon Business Key Figures , 2008, p. 68 ff.
  12. ↑ Jörg Wöltje, Reading, Understanding and Designing Balance Sheets , 2012, p. 306
  13. ↑ Jürgen Veser / Wolfgang Jaedicke, Equity in the construction industry , 2006, p. 62