Borrowing

This is a measure of how responsibly the company is borrowing and how effectively it is managing debt. In your performance review, we focus on your net profitability and its relationship with your company debts to see if there is any sort of correlation. We compare your company's debt with industry peers' debts, and analyze whether the company is in a healthy position to borrow. There are three major ratios that your performance review takes into account to provide you with a comprehensive borrowing score:

  • Interest Coverage Ratio= *EBITDA / Interest Expense: This ratio measures a company's ability to service debt payments from operating cash flow (EBITDA). An increasing ratio is a good indicator of improving credit quality. The higher the better.
  • Debt-to-Equity Ratio= Total Liabilities / Total Equity: This Balance Sheet leverage ratio indicates the composition of a company’s total capitalization -- the balance between money or assets owed versus the money or assets owned. Generally, creditors prefer a lower ratio to decrease financial risk while investors prefer a higher ratio to realize the return benefits of financial leverage.
  • Debt Leverage Ratio= Total Liabilities / EBITDA: This ratio measures a company's ability to repay debt obligations from annualized operating cash flow (EBITDA).

 

*EBITDA is covered in greater detail in the "Valuation" course.

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WeDoBooks HQ, Inc, is a related company to the firm of Michael DiSabatino, CPA