Debt indicators: metrics and how to monitor them
Financial performance shows whether a company is doing badly, needs attention, or is operating efficiently. To reach a conclusion, the results of the debt indicators cannot be left out of the financial statement.
As businesses grow and consolidate their operations in the market, the country’s economy also develops, generating more investment and employment opportunities.
The indicator considers the satisfaction of industries with their operating profit margin, financial status and ease of access to credit. The overall assessment of the situation and financial stability of businesses is positive, with good prospects and confidence for 2024.
Therefore, monitoring key financial management indicators is strategic to monitor the progress of operations and prevent small problems from escalating, compromising operations.
Continue reading the article and learn about the main debt indicators, how to calculate each metric and the importance of close monitoring.
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What are the main indicators of debt?
Debt indicators are metrics that show how dependent a company is on third-party capital to keep its operations active. There are several indexes and we list the main ones below:
1. Third-party capital participation (PCT)
The share of third-party capital (PCT) indicates how much of the company’s funds come from other sources. In other words, it shows the overall debt of the business. The indicator is computed using the following formula:
- PCT = (Current Liabilities + LP Liabilities) ÷ (Current Liabilities + LP Liabilities + Equity).
Current liabilities mean short-term debt (less than 12 months), and LP liabilities mean long-term commitment (more than 12 months).
Net equity includes equity capital, such as profits and resources invested by partners. When the PCT is greater than 1, the result means that there are no longer any equity resources involved in the operation.
2. Long-term asset immobilization (LRIP)
Another debt indicator is the IRPJ, or immobilization of long-term resources , which shows how much the company invests of its long-term funds and equity in immobilized capital. The formula for calculating the indicator is as follows:
- IRPL = Fixed Assets ÷ (Liable from LP + Equity)
In general, the higher the result, the greater the risk that the company will have difficulty paying off its business costs and debts.
3. Immobilization of net assets (IPL)
IPL ( equity immobilization ) is also one of the debt indicators. The metric indicates the current situation of the business’s capital structure.
This assessment is important because a high volume of fixed assets means fewer available resources, which can quickly turn into cash, increasing the likelihood of having to resort to third parties. The formula is used to perform the calculation:
- IPL = Fixed assets ÷ Equity
The higher the result, the greater the volume of immobilized capital compared to net equity, which means a high insolvency rate.
4. Debt Composition (CE)
Debt composition ( CE) is an indicator that helps determine how much of the existing debt is short-term, i.e. less than 12 months. The calculation formula is:
- CE = Current Liabilities ÷ (Current Liabilities + LP Liabilities)
A high ratio means that the company has many financial commitments concentrated in a short period of time, and may have difficulty meeting them. The opposite scenario indicates good cash flow .
5. Financial indebtedness (FE)
Financial debt ( FE) is an indicator of debt that shows the result of the comparison between the value of the debt and the amount invested by the partners/owners. The formula for calculating it is:
- EF = (Gross Debt ÷ Equity) x 100
The higher the EF percentage, the higher the company’s level of indebtedness.
6. General indebtedness (GE)
Closing the list of debt indicators, we have General Debt (GE). The metric indicates the size of the debt commitment in relation to the company’s total assets. The formula is used to perform the calculation:
- EG = (Debt capital ÷ Total assets) x 100
A high result indicates that the debt ratio is high, and the company may have difficulty meeting its financial commitments.
How to calculate the debt ratio?
The data used to calculate debt indicators are extracted from the company’s balance sheet. Therefore, it is essential that the accounting document be prepared annually to facilitate calculations using the formulas for each indicator and the financial assessment .
The assistance of an accountant makes the process easier, as the balance sheet gathers data related to the company’s current and fixed assets and liabilities. Therefore, an error can compromise the interpretation of the results.
As we highlighted, the higher the results of the debt indicators, the greater the risk of insolvency, that is, of the company going bankrupt.
How important is it to monitor these results?
Calculating debt indicators is important because it avoids surprises regarding debts, allowing companies to adopt preventive and recovery measures before the problem escalates.
Owners, together with financial managers, can make more precise decisions and define how they will act to overcome the current situation.
In this way, the company can seek strategies to reduce business costs or attract more customers, increasing monthly revenue and avoiding requests for loans with high interest rates.
Reduce costs and improve your planning
Cost reduction helps both in controlling debt indicators and operational efficiency, as the solutions optimize the team’s work and productivity.
Among the main savings in the industry, the reduction in electricity costs is the main one. Companies’ access to the Free Energy Market allows direct negotiation with suppliers and access to more competitive prices, in addition to the possibility of purchasing clean energy.