How to Maintain a Constant Debt-Equity Ratio?
Well, whenever we hear the word debt, we tend to think of high interest rates, credit card bills and probably even bankruptcy.
If you have a business, debt is not that bad.
In fact, most investors and analysts want companies to use debt smartly for funding business.
This is exactly the place the debt to equity ratio comes in.
I am sure, you must have heard of it a number of times.
The debt to equity ratio is one of the most crucial financial indicators investors prefer to have a look at before they consider making an investment.
Now, how do you define this ratio and what are steps you can take to keep it stable?
What is Debt to Equity Ratio?
The debt to equity ratio measures the financial leverage of a company. It represents the amount of equity and debt that is used to finance company assets.
This ratio will help you to measure the financial health of your organisation. You can get this value by dividing your liabilities by owner’s equity.
Now, let us find out the ways that can help to improve your debt to equity ratio.
Issue Common Stock
What is common stock?
Common stock refers to ownership in business and this allows the stockholders the right to vote in significant business matters.
When a company issues common stock, the investors contribute cash to business for shares. Businesses report this amount as contributed capital in stockholder’s equity section, thereby increasing the total equity.
Debt to Equity Swap
This swap is very common in the financial world. This allows borrowers transform loans to shares of equity or stock.
Usually, financial institutions like a bank holds new shares after debt is transformed to equity shares.
If you want to restructure your debt and equity mix and ensure long-term success, you can consider this swap.
All shareholders can exchange stock for a particular amount of debt in case of this swap.
Lease your Assets
You can lease your assets to improve the debt to equity ratio.
Leasing allows companies to buy the requisite equipment.
Leasing can ensure bigger profits, ensure tax breaks and also help you with overall budgeting.
When businesses lease an asset, it classifies the lease as capital lease or operating lease for accounting.
This classification casts a significant impact on financial statements.
Leasing is not the option for all businesses or in all scenarios. Your accountant can determine whether leasing is a feasible option for your business.
Increase Sales and Revenues
Well, all of you know this to be one of the best and most feasible options to increase the debt to equity ratio.
To increase sales and revenue, here are some steps to abide by.
- Review the pricing structure
- Expand distribution channels
- Have clear and well-defined goals
- Bundle and upsell products
The debt to equity ratio is valuable for the investors and entrepreneurs alike.
So, plan your finances well in advance, be prepared to face the worst-case scenario in this pandemic and ask yourself, can you maintain debt payments without cutting down the cash flow?