What is Long-Term Debt Ratio and Why Should You Care?
The Long-Term Debt Ratio gives investors and creditors a snapshot of how much of a company's debt is tied up in long-term obligations, such as loans, bonds, and lease obligations that aren't due within the next 12 months.
Why should you care? Because a lower Long-Term Debt Ratio indicates a potentially healthier financial situation, while a higher ratio could mean more financial risk. Think of it as the financial equivalent of checking your blood pressure – you want to catch potential issues early.
How to Calculate Long-Term Debt Ratio
Calculating the Long-Term Debt Ratio isn't rocket science. Here's how you can do it:
- First, identify the total long-term debt. This is the sum of all debt obligations that mature in more than one year
- Next, find the total debt. This includes both short-term and long-term debt
- Plug these numbers into the following formula:
[\text{Long-Term Debt Ratio (LTDR)} = \frac{\text{Total Long-Term Debt}}{\text{Total Debt}} \times 100]
Where:
- Total Long-Term Debt is the sum of all debts maturing beyond one year
- Total Debt is the cumulative amount of all short-term and long-term debts
Calculation Example
Let's make this more tangible with an example. Pretend you're the CFO of a company and you want to evaluate your financial position.
- Total Long-Term Debt: $2,000
- Total Debt: $5,000
Now, using our formula:
[\text{LTDR} = \frac{2,000}{5,000} \times 100 = 40.00%]
The Long-Term Debt Ratio is 40%.