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Intro to "Commercial Debt Ratio"

Calculate your Business' Debt Ratios and Evaluate its Potential to Obtain Additional Debt

 

Try the Commercial Debt Ratio Calculator >

 

Commercial Debt Ratio Increasing debt often means increasing the risk, but it can also increase the chance of success if the money is well managed. You could, with this calculator, calculate your debt ratios and estimate the additional debt your company could obtain. Therefore, you can evaluate your company's potential growth based on its current structure.

When you enter the amounts of assets and liabilities of the business (short-term and long-term), the calculator will calculate the three main debt ratios. Then, you can enter the ratios' limit that banks impose as a condition to grant new loans, or you can enter the ratios of the industry for comparison, and the calculator will indicate the amount of money the company would be able to get as additional debt to finance new assets.

The amount of additional debt generated by the calculator prioritizes the long-term debt first, since this debt is the most interesting one for the business. Indeed, long-term indebtedness can increase the competitiveness of a company and offers better chances of success. Additional short-term debt does not have the same impact, because we are looking at short-term accounts to keep a self-sufficient turn over at the lowest cost; we cannot hope to launch a business by investing considerable amounts on short-term assets.

As well, the calculator doesn't take into consideration a potential capital surplus from the shareholders, i.e. an additional investment that could increase the equity and adjust the debt ratios in order to finance additional assets without obtaining new debt. The calculator ignores this scenario because the objective is to verify if there is room for additional indebtedness based on the current structure, without asking for additional investment from the shareholders. The book value of equity will stay the same for the calculation.

Finally, the calculator follows the basic rule of accounting and take into consideration that, in a scenario where the book value of equity stays the same, a decrease of debt is paid by the present assets and an increase of assets is financed by additional debt. As a consequence, the assets and liabilities increase or decrease for the same amount, and the fluctuation of short-term accounts and long-term accounts are kept separated. Here are a few examples to illustrate the fluctuations:

A company decides to finance a new
truck at $50,000.00:

Long-term Asset
Truck Value
+ 50,000
Long-term Debt
Balance Payable
+ 50,000

The long-term asset and long-term debt increase by $50,000.00.

A company decides to pay their suppliers
an amount of $10,000.00:

Short-term Asset
Bank Account
- 10,000
Short-term Debt
Account Payable
- 10,000

The short-term asset and short-term debt decrease by 10,000.

 
 

Try the Commercial Debt Ratio Calculator >

 
 
 
 
Numbers in our calculators are rounded to two decimals.
The same calculations made in an Excel spreadsheet may differ slightly.

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