What is Target Debt Ratio?

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financial

Category: Tags: asked June 22, 2012

4 Answers

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A debt service measure that financial lenders use as a rule of thumb to give a preliminary assessment of whether a potential borrower is already in too much debt. More specifically, this ratio shows the proportion of gross income that is already spent on housing-related and other similar payments.

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Look in the statement of financial positionTotal assets = current assets + non-current assetsIn the case of Jan 31, 2009, Total assets is clearly disclosed in bold as $44,106millions.Total liabilities = current liabs + non-current liabsIn the case of Jan 31, 2009, current liabs = $10,512m and non-current liabs = $19,882m, so total liabs = $30,394mDebt to asset ratio = 30,394/44,106 = 0.69Explanation of Debt to Asset Ratio:The Debt to Asset Ratio measures the percentage of the company's Total Assets that are financed with debt (Total Liabilities). This ratio basically looks at what debt the company owes, and compares that debt to what assets the company owns.Importance of Debt to Asset Ratio:The lower the Debt to Asset Ratio, the better, as companies with high amounts of debt introduce more risk. You certainly want to look very hard at companies that have more Total Liabilities than Total Assets, as this is a precarious position for a company to be in. Depending on the industry of the company, you might expect the company to have two or three times as many assets as liabilities. Anything less than this might be a signal that the company is running into trouble.

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Target Debt Ratio is the target proportion of a firm's total assets that are being financed with borrowed funds. The debt ratio is calculated by dividing total long-term and short-term liabilities by total assets. Assets and liabilities are found on a company's balance sheet.

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Debt to equity is one of the most popular measures of debt and credit risk. This is because, in terms of ownership, there are only two ways to finance a company: debt and equity. A company with more debt than equity must pay off this debt off, which represents a claim against the company's assets. A company financed more with equity is not required to pay back its investors; therefore, the company represents less risk to the company. The target debt to equity varies by industry and company objectives, but there are some common thresholds.*

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