InvestorQ : What does the balance sheet tell us about the indebtedness of the company that we are looking at?
Dhwani Mehta made post

What does the balance sheet tell us about the indebtedness of the company that we are looking at?

Answer
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Anamika Sodhani answered.
1 year ago


Balance sheet tells us if the company is too leveraged or not. That means if the company has too much of debt on its books. What do we understand by leverage? It shows the composition of long term debt in the balance sheet of the company. Long term debt includes term loans from institutions, long term debentures issued, bonds issued etc. These long term debt items are shown on the liability side of the balance sheet. Balance sheet leverage measures the extent of debt on the balance sheet and it is important as it reflects the financial risk that the company is running. For example, a debt/equity ratio of 2:1 is considered normal but a debt equity ratio of 6:1 exposes the company to a huge financial risk. Debt is not just about size but also about costs. You also need to look at coverage ratios like interest coverage ratio and debt service coverage ratios to get a proper picture of cost of debt. Normally, the debt/equity ratio is always looked at in conjunction with the cost of debt to get a much clearer picture.