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DEBT RATIO Definition

DEBT RATIO measures the percent of total funds provided by creditors. Debt includes both current liabilities and long-term debt. Creditors prefer low debt ratios because the lower the ratio, the greater the cushion against creditors losses in liquidation. Owners may seek high debt ratios, either to magnify earnings or because selling new stock would mean giving up control. Owners want control while "using someone elses money." Debt Ratio is best compared to industry data to determine if a company is possibly over or under leveraged. The right level of debt for a business depends on many factors. Some advantages of higher debt levels are:

• The deductibility of interest from business expenses can provide tax advantages.
• Returns on equity can be higher.
• Debt can provide a suitable source of capital to start or expand a business.

Some disadvantages can be:

• Sufficient cash flow is required to service a higher debt load.
• The need for this cash flow can place pressure on a business if income streams are erratic.
• Susceptibility to interest rate increases.
• Directing cash flow to service debt may starve expenditure in other areas such as development which can be detrimental to overall survival of the business.

 Formula: Total Liabilities / (Total Liabilities + Stockholders Equity)

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NET ASSET VALUE (NAV) in securities, except money market funds which always have a NAV of $1.00, represents the market value or price of one fund share. It is calculated by the total value of the funds portfolio less liabilities divided by the number of shares; or, in corporate valuations, it is a measure of the shareholders' aggregate wealth in the company, which is defined as the actual or hypothetical market value of the company's assets less its liabilities.

AUDIT BUREAU OF CIRCULATION (ABC) is a third-party organization that verifies the circulation of print media through periodic audits.

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