Long-term borrowing ratio: calculation formula and features

An enterprise or organization owns certain property. To get it, you need financial sources. They can be your own or borrowed. All sources of financing are reflected in the passive of Form No. 1 "Balance". The structure of the company's capital requires constant monitoring.

The ratio of means of liability must be maintained in a certain proportion. Analysis of the structure makes it clear, at the expense of what types of capital all the company's assets are formed. If own liabilities are not enough, the enterprise is characterized as financially unstable. In the process of research, the coefficient of long-term borrowing is estimated. It provides information on the status of financial resources. Therefore, every analyst should know this technique. It will be discussed further.

general characteristics

To properly understand what the long-term borrowing ratio is , you need to understand the terms. The passive consists of own and attracted funds. Debt payable, in turn, can be long-term and short-term. In the latter version, the funds are attracted by the enterprise for a period of less than 1 operational period.

Long-term liabilities are liabilities that the enterprise has and the maturity of which is more than 1 year. This item of the balance sheet includes creditor (long-term) debt, bonds, leases, liabilities for pension accruals.

These funds are taken from banks or other organizations. And the use of money investors, for obvious reasons, is not gratuitous. For the agreed period the company must pay the creditor the full amount of the loan plus interest. Therefore, these sources of funding are also called paid.

Composition

To correctly calculate the long-term borrowing ratio on the balance sheet, it is necessary to understand to have an idea of the components of this source of financing. First of all, long-term loans are included here. Part of the investor's funds, which will be fully paid at the end of the term, applies to short-term liabilities.

Also included are bonds. These are debt securities issued by the enterprise in order to attract new financial sources.

Long-term loans include rent. But this is only true if it is carried out for a long period of time. The structure also includes reserves and funds. These are obligations that are created from profit before taxation. They look like debts. Their enterprise will pay in the future in the form of pensions, employee deposits, bonuses to staff, etc.

Features of attraction

The coefficient of long-term borrowing, the norm of which is established taking into account the type of activity of the organization, reduces the financial stability of the company. The more the organization determines the debt obligations, the higher the risk of non-return of funds to investors.

To interest the creditors, the enterprise must promise them beneficial terms of the transaction. An organization that has not used previously borrowed capital is attractive to investors. After all, a significant amount of equity guarantees a return of their funds on time, as well as payment in the form of interest.

If, in the structure of the balance sheet, the number of paid sources of financing increases, the risk for investors does not return their funds within the period stipulated by the contract. They do not want to invest their money in such a company. To interest them, management offers them a higher payment for the use of borrowed capital. In this case, the economic benefit for the enterprise decreases. Therefore, the ratio of capital reflected in the passive is necessarily controlled by analysts.

The need for long-term financing

Studying the coefficient of long-term borrowing, it is necessary to understand their importance in the organization of the company. When using exclusively own (free) sources of financing, the company's stability is determined as the highest. With the advent of borrowed (paid) capital in the structure of the balance, this indicator begins to decrease.

However, do not think that a company that carries out its activities only at the expense of its own capital is more successful. The indicator of the financial result of any enterprise in the market economy is net profit. It, in turn, affects the indicators of profitability. With reasonable attraction of paid resources, net profit can significantly increase. With a slight decrease in financial stability, the growth in profitability of production is a sign of the correct organization of the organization's work. Therefore, companies tend to attract long-term paid sources.

Calculation formula

To assess the correctness of the organization of the structure of the balance, the long-term borrowing ratio is applied. The formula of its calculation allows to understand, what part of production activity is provided by long-term sources of financing. About what is at stake7 As this part of the company's assets is financed from its sources, the formula for the long-term capital raising ratio will look like this:

- Кппс = ДП: (ДП + СК), where ДП - long-term liabilities, СК - own financial sources.

This formula does not take into account short-term loans. This allows us to assess the structure of capital from the perspective of long-term own and borrowed financial sources.

Balance calculation

Forms No. 1 of the financial statements are necessarily used if you need to calculate the long-term borrowing ratio. Article number 1400 in the balance sheet reflects the amount of all long-term liabilities of the company on the date of the accounting. It is taken into account in the calculations. Article 1300 reflects the amount of equity capital. Therefore, these data are also taken into account by analysts.

Taking into account the balance sheet data, the formula for the long-term borrowing ratio will be as follows:

- QPS = c. 1400: (pp. 1400 + pp. 1300).

This calculation is valid for those enterprises in which the amount of all long-term loans significantly exceeds other liabilities with a maturity of more than the operational period. But if the value of the latter is too high, then it is better to take article 1410 instead of article 1400.

The standard

Each company investigates the long-term borrowing ratio. The standard of the indicator depends on the industry in which the company operates. Also it is monitored in dynamics. The growth of the indicator in comparison with the previous periods with a decrease in the profitability of operating activity suggests an inexpedient increase in the structure of the liabilities of long-term borrowed funds.

Therefore, an exemplary value for this coefficient is not established. Total liabilities (short-term and long-term) should not exceed 50% in the balance structure.

Applying the result

The information provided by the analysis during this analysis is used by analysts, company management, and investors in their work. The coefficient of long-term borrowing shows how strongly the object of research depends on borrowed capital. Increasing it in dynamics is a negative signal.

However, in order to perform a full valuation of the company's activities, it is necessary to apply the result of this analysis in conjunction with the indicators of financial stability, the coefficients of profitability and financial leverage. This will help to look at the whole picture in a complex way. Not always an increase in the long-term attraction of paid sources of financing is a negative factor. If the organization does not use additional capital received from investors in its activities, it loses its benefits.

Solvency

To study the coefficient of long-term borrowing, the normative value is established by comparing the object of research with other enterprises in the industry. But in the modern world, these methods are used more widely. You can compare the organization of financial sources of enterprises around the world.

In foreign practice of financial accounting, it is customary to regard borrowed capital as a combination of long-term and short-term investments. To make it easier to compare enterprises of different countries, EBITDA is used to estimate the structure of the balance sheet. This is the financial result of the company's activities before taxes, depreciation and interest. It allows you to assess the solvency of the organization.

Valuation of long-term liabilities

Having calculated the coefficient of long-term borrowing, the analyst should evaluate other indicators of organization of the structure of the balance sheet. To do this, the borrowed capital is compared with the EBITDA. In this case, short-term loans are also taken into account. The entire amount of debt is divided by EBITDA.

In the world practice, the norm of this indicator is adopted. If the result exceeds 4-5, it is necessary to reduce the amount of debt obligations. Otherwise, the company has problems with timely payment of interest and loan amount. At the same time, the investment attractiveness of the company under study falls.

Evaluation of long-term liabilities is an important stage in the financial analysis of the enterprise. Optimizing the structure of the balance allows you to effectively organize the property and receive the greatest amount of net profit. Therefore, the presented coefficient is not left without attention of analysts and is considered in dynamics, in combination with other indicators.