Question

Do you think companies should not go for long term debt in their capital structure to remain solvent. Search and let us know what is the industry norm for your company when it comes to debt/equity ratio.

Answer 1

It depends entirely on how efficiently the company can rely in its business operations by maintaining equity and debt finance. Debt to equity is healthy when it's 4:6 ratio but debt being excessive than equity holdings is always a threat. Also debt doesn't come free, it comes with future costs, transaction costs etc. It only helps when the company's cash flows are exceeding in it's revenues and the company's product is capable enough to meet it's service and product supply demand in the market.

Solvency depends on how efficiently the company is able to manage it's expenses, income, revenue, and operational performance. Also depends on the size of a company and it's presence among the countries. There takes a cost to obtain firm's debt and equity and also company management needs to be bothered about solvency and the financial leverage.

For the smaller companies the suggestible debt could be 2 while equity can be an 8 by debt/equity ratio. For medium companies the suggestible debt can be little more than the equity. For larger companies it can be lesser to equal compared to the equity financing for the company.