An enterprise or organization owns certain property. To purchase it, financial sources are required. They can be their own go borrowed. All sources of financing are reflected in the liability form No. 1 “Balance”. The capital structure of the enterprise requires constant monitoring.
The ratio of liabilities must be maintained in a certain proportion. An analysis of the structure makes it possible to understand at the expense of which varieties of capital all the property of the company is 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 correctly understand what is the ratio of long-term borrowing, you need to understand the terms. A liability consists of equity and borrowed funds. Debt payables, in turn, can be long-term and short-term. In the latter embodiment, funds are attracted by the company for a period of less than 1 operating period.
Long-term liabilities are obligations that an enterprise has and a maturity of more than 1 year. This balance sheet item includes accounts payable (long-term), bonds, leases, pension accruals.
The company takes these funds from banks or other organizations. Moreover, the use of investor money, for obvious reasons, is not free. For the agreed period, the company must pay the lender the full amount of the loan plus interest. Therefore, such sources of financing are also called paid.
Structure
In order to correctly calculate the ratio of long-term borrowing on the balance sheet, you need to understand the understanding of the components of this source of financing. First of all, this includes long-term loans. Part of the investor's funds, which will be fully paid at the end of the application period, relates to short-term liabilities.
This also includes bonds. These are debt securities issued by an enterprise in order to attract new financial sources.
Long-term loans include rental. But this is true only if it is carried out for a long time. The structure under consideration also includes reserves and funds. These are liabilities that are created from profit before tax. They look like debt. Their company will pay in the future in the form of pensions, employee deposits, bonuses to staff, etc.
Attraction Features
The coefficient of long-term borrowing, the norm of which is set 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 lenders, the company must promise them favorable terms of the transaction. An organization that has not used previously borrowed capital is attractive to investors. Indeed, a significant amount of equity guarantees the return of their funds on time, as well as payment in the form of interest.
If, in the structure of the balance sheet liability, the number of paid sources of financing increases, the risk for investors not to return their funds in the period agreed upon by the agreement increases. They do not want to invest in such a company. To interest them, the management offers them a higher payment for the use of borrowed capital. In this case, the economic benefit to the enterprise is reduced. Therefore, the ratio of capital reflected in the liability is necessarily controlled by analysts.
The need for long-term financing
Studying the ratio of long-term borrowed funds, it is necessary to understand their importance in the organization of the company. Using exclusively its own (free) sources of financing, the company's sustainability is defined as the highest. With the advent of borrowed (paid) capital in the balance sheet structure, this indicator begins to decrease.
However, you should not think that a company that operates only at the expense of equity is more successful. Net profit is an indicator of the financial result of any enterprise in a market economy. It, in turn, affects profitability. With a reasonable attraction of paid resources, net profit can increase significantly. With a slight decrease in financial stability, an increase in the profitability of production is a sign of the proper organization of the organization. Therefore, companies seek to attract long-term paid sources.
Calculation formula
To assess the correctness of the organization of the balance sheet structure, the coefficient of long-term borrowing is used. The formula of its calculation allows us to understand what part of the production activity is provided by long-term sources of financing. What is it about7 Since the company finances this part of the property from its sources, the formula for the long-term capital raising ratio will look like this:
- Kdps = DP: (DP + SK), where DP - long-term liabilities, SK - own financial sources.
This formula does not take into account short-term loans. This allows you to evaluate the capital structure from the position of long-term own and borrowed financial sources.
Balance calculation
The data of form No. 1 of the financial statements are necessarily used if you need to calculate the coefficient of long-term borrowing. Article number 1400 in the balance sheet reflects the number of all long-term liabilities of the company at the date of accounting. It is taken into account in the calculations. Article 1300 reflects the amount of equity. Therefore, these data are also taken into account by analysts.
Given the balance sheet data, the formula for the long-term borrowing ratio will look like this:
- Kdps = s. 1400: (p. 1400 + p. 1300).
This calculation is valid for those enterprises for which the sum of all long-term loans significantly exceeds other liabilities with a maturity of more than the operating period. But if the magnitude of the latter is too large, then for the calculation instead of article 1400 it is better to take article 1410.
Normative
Each company examines the ratio of long-term borrowing. The norm of the indicator depends on the industry in which the company operates. It is also tracked in dynamics. An increase in the indicator compared to previous periods with a decrease in the profitability of operating activities indicates an inappropriate increase in the structure of the liability of long-term borrowed funds.
Therefore, the model value for this coefficient is not established. The total amount of liabilities (short-term and long-term) should not exceed 50% in the balance sheet structure.
Application Result
The information that this technique provides in the analysis is used by analysts, company management, and investors in their work. The long-term borrowing ratio shows how much the research object depends on the borrowed capital. Its increase in dynamics is a negative signal.
However, to carry out a full assessment of the company’s activities, it is necessary to apply the result of this analysis in combination with indicators of financial stability, profitability ratios and financial leverage. This will help to take a comprehensive look at the whole picture. Not always the growth rate of long-term attraction of paid sources of financing is a negative factor. If the organization does not use in its activities the additional capital received from investors, it loses its benefits.
Solvency
To study the coefficient of long-term borrowing, the normative value is established by comparing the object of study with other enterprises in the industry. But in the modern world, such methods are used more widely. You can compare the organization of financial sources of enterprises around the world.
In the 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 from different countries, EBITDA is used to assess the balance sheet structure. This is the financial result of the company before taxes, depreciation and interest. It allows you to evaluate the solvency of the organization.
Valuation of long-term liabilities
Having calculated the coefficient of long-term borrowing, the analyst must evaluate other indicators of the organization of the structure of the balance sheet liability. For this, borrowed capital is compared with EBITDA. At the same time, short-term loans are also taken into account. The total amount of debt is divided into EBITDA.
In world practice, the norm of this indicator is adopted - 3. If the result obtained 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 decreases.
Assessment of long-term liabilities is an important stage in the financial analysis of the enterprise. Optimization of the balance sheet structure allows you to organize property as efficiently as possible and get the largest amount of net profit. Therefore, the presented coefficient does not remain without the attention of analysts and is considered in dynamics, in combination with other indicators.