Debt concentration ratio. Optimal balance structure

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Every large enterprise seeks to optimize its capital structure. It is formed from own and borrowed sources. Moreover, their ratio should be maintained at the established level. Analytics allows you to determine the company's need for a particular source of financing for its activities.

One of the components of the organization's financial stability methodology is the debt capital concentration ratio. It is calculated according to the established formula and has a clearly defined value. How to calculate the presented indicator, as well as interpret the result? There is a certain technique.

The essence of the coefficient

The debt capital concentration ratio shows the volume of paid financial sources in the balance structure. Each enterprise must organize its activities using its own capital. However, raising debt capital opens up new prospects for the organization.

A company that wisely uses paid sources of funds can purchase new high-tech equipment, introduce a new production line, expand sales markets, etc. To do this, the level of borrowed funds must remain within certain limits. It is set for each enterprise separately.

Attracting long-term and short-term loans increases the company's risks. However, the higher they are, the greater the amount of net profit the organization can potentially receive. The state of the share of paid liabilities must be monitored by the analytical service of the enterprise.

The essence of borrowed funds

The value of the debt capital concentration ratio in calculating financial stability is extremely high. Such funding sources have a number of characteristic features. Their involvement carries both benefits and additional costs.

A company that raises funds from outside investors opens up new perspectives and opportunities. Its financial potential is growing rapidly. At the same time, the cost of the presented sources remains quite acceptable. With the proper use of additional funds, you can increase the profitability of the company. In this case, the profit grows.

However, attracting investment sources from outside has a number of negative characteristics. Such capital increases risks, reduces indicators of financial stability. It is quite difficult to arrange such a procedure. Much of the costdepends on the level of development of a particular market. The organization's income will be reduced by the cost of using investor funds (loan interest).

Methodology for determining the indicator

Balance sheet data will help to calculate the debt capital concentration ratio. The calculation formula is simple. It reflects the ratio between the indicator of external loans and the balance sheet. This is the actual debt load that is placed on the organization. The calculation formula looks like this:

CC=C / B, where: C - the amount of loans (short-term and long-term), B - balance sheet currency.

Calculations are made based on the results of the operating period. Most often it is 1 year. However, for some companies it is more profitable to make payments quarterly or every six months.

Paid sources of funding are presented in lines 1400 and 1500 of form 1 of the financial statements. The total amount of the balance sheet is indicated on line 1700. This is a simple calculation, the result of which will help to draw conclusions about the harmony of the organization of the capital structure.

Normative

According to the above system, you can calculate the concentration ratio of borrowed capital. The standard value will allow you to analyze the result. For the presented indicator, there is a certain range of values at which the balance sheet structure can be called effective.

Concentration factor of external sourcesfinancing can be in the range from 0.4 to 0.6. The optimal value depends on the type of activity of the company, the characteristics within the industry. For example, enterprises with a pronounced seasonality of activity may have low concentrations of credit funds.

To make a conclusion about the correctness of the structure of financial sources, it is necessary to study the presented indicator of competing firms. So it will be possible to calculate the intra-industry indicator. The value of the coefficient obtained during the study is compared with it.

Financial benefit

In some cases, the amount of credit funds of the organization may be too large or, conversely, low. This indicates an incorrect organizational structure of the balance sheet. The above norm of the debt capital concentration ratio is applicable for most domestic companies. Foreign organizations may have more loans in the liability structure.

If a company during the study determined that the concentration ratio is below the norm, it means that it has accumulated a large number of borrowed financial sources. This is a negative factor for further development. In this case, the risks of non-repayment of the debt increase. The cost of credit will increase. It is necessary to reduce the amount of borrowed funds in liabilities.

If, on the contrary, the indicator is above the norm, the company does not attract additional resources for its development. It turns out to be a lost profit. Therefore, a certain amountthird-party investor funds must be applied by the company.

Calculation example

To understand the essence of the presented methodology, it is necessary to consider an example of calculating the debt capital concentration ratio. The balance formula above is applied during the study.

For example, the company completed the operating period with a total balance sheet total of 343 million rubles. In its structure, 56 million rubles were determined. long-term liabilities and 103 million rubles. short term debts. In the previous period, the balance sheet amounted to 321 million rubles. Short-term liabilities were 98 million rubles, and long-term sources of financing - 58 million rubles.

In the current period, the concentration ratio was as follows:

KKt=(56 + 103) / 343=0, 464.

In the previous period, the same indicator was at the level:

KKp=(98 + 58) / 321=0, 486.

The result is within the established norm. In the previous period, the company's activities were largely financed by third-party sources. The company has prospects for attracting credit funds. The presented indicator must be calculated in conjunction with other calculation systems.

Financial leverage

The leverage indicator (leverage) allows analysts to correctly assess the dependence of the debt capital concentration ratio on business environment conditions. The combination of these two calculation methods allows you to set the level of efficiencyuse of available capital, opportunities for its further increase at the expense of credit sources.

Leverage shows the benefit that an organization receives when using borrowed funds. To do this, calculate the return on equity of the organization. In the course of such a study, the company's need to attract external sources of financing, as well as the current return on total capital, is established.

With proper use of loans, you can increase the net income. The funds received are invested in the development and expansion of the business. This allows you to increase the final figure of net profit. This is the point of using paid funds from investors.

Profitability

The debt capital concentration ratio must be considered in the general system of analytical calculation. Therefore, along with the presented methodology, other indicators are also determined. Their combined analysis allows us to draw the right conclusions about the capital structure.

One of these indicators is the return on borrowed capital. For calculation, net profit for the current period is taken (line 2400 of Form 2). It is divided into the amount of long-term and short-term loans. If the net profit is higher than the amount of paid sources, the company harmoniously uses the funds received from third-party investors in its activities.

Return on debt capital is studied in dynamics. This allows conclusions to be drawn aboutfurther action.

Structure management

The debt concentration ratio becomes the first indicator in the development of the organization's financial strategy. Based on the calculations made, the company's management may decide to further attract loans and credits.

During the planning, the need for additional sources is determined. Risks, future profits, as well as ways of developing production are assessed. The cost of investors' capital is determined. Based on research, the company decides on the possibility of additional attraction of borrowed capital.

Having considered what the debt capital concentration ratio is, the method of its calculation and the approach to interpreting the result, you can correctly assess the structure of the balance sheet and make a decision on the further development of the organization.