Financial prudence is therefore essential in order to manage debt effectively in the face of growing credit demand.
Debt, being a long-term commitment, exposes companies to long-term debt related stress including fear of default, lack of cash flow to meet the repayment obligation on time, and cost of debt among others.
A company experiences over indebtedness when it fails to manage the debt appropriately.
Debt stress to a company is similar to debt stress at the household level. It means a company does not have cash to meet its regular debt repayment obligations.
This could be due to a variety of reasons, ranging from delays in collections to the company being over indebted. Also the cash flows may not be sufficient to service the high level of debt burden. It could also be due to business downward cycle.
Financial prudence is therefore essential in order to manage debt effectively in the face of growing credit demand.
Debt, being a long-term commitment, exposes companies to long-term debt related stress including fear of default, lack of cash flow to meet the repayment obligation on time, and cost of debt among others.
A company experiences over indebtedness when it fails to manage the debt appropriately.
There will always be plentiful of signs that a company is experiencing debt distress.
Companies can, therefore, perform stress tests and develop frameworks to detect at an early stage, symptom of debt distress and quickly implement remedial actions. Some of the early warning stress signals for detecting debt distress include:
Higher Debt to Equity Ratio For companies, the quickest test to calculating a company’s debt carrying capacity is the debt to equity ratio, also known as gearing ratio in technical jargon. The debt to equity ratio is a solvency ratio that shows the relation between the portion of assets financed by lenders and shareholders.Using figures obtained through financial statements, the ratio is used to evaluate a company’s financial leverage. For a country, its equivalent is the Gross Domestic Product (GDP) to debt ratio.Whereas a country like the USA is projected to have debt to GDP of 115 percent by end of 2021, commercial companies can ill afford the luxury of having more debt than the value of the company. To do that is indeed suicidal and can be seen as an express ticket to bankruptcy.This is why it is so crucial for debt policies to not only define the type, form and structure […]