Long term debt/equity

The long term debt to equity ratio is simply similar to gearing, except that short term debt is excluded from the calculation. This is most simply interpreted as a measure of capital structure, but is also used as a measure of financial strength.

One shortcoming of the use of long term debt/equity with regard to capital structure is that borrowing that appears to be short term on the face of the balance sheet may in fact be rolled over or be provided from a continuing facility such as an overdraft (which may be provided for many years, even though re-payable on demand) — so its economic effect is that of long term debt.

As a measure of financial strength it is obviously incomplete as it excludes short term debt. It is therefore likely that it would be used in conjunction with a measure such as the quick assets ratio or the current ratio.

The long term debt/equity ratio is often used in debt covenants: where it will certainly be supplemented by several other metrics.

Copyright Graeme Pietersz © 2005-2019