Debt Payment Calculation, How to Calculate Debt Repayments
Debt payment calculation refers to the duration of how long it can take you to pay off your debt. This calculation involves the minimum payment, chosen a fixed value, and the due time you prefer to pay the full amount. Calculating your debt is imperative as it allows you to estimate the length of time that you can be debt-free.
Debt Ratio:
The debt ratio is also referred to as the solvency ratio that covers the entire debts as a portion of the firm’s total assets. This implies the company’s capacity to cover its indebtedness with its assets. In short, a debt ration conveys the sum of assets that the firm can dispose of to get rid of its liabilities or obligation.
Formula:
The debt ratio is computed by dividing total liabilities by the total assets. These two numbers can easily be found on the balance sheet. Moreover, the debt ratio determines the whole debt load of the firm and not only the prevailing debt:
DEBT RATIO = Total Liabilities / Total Assets
Analysis:
A debt ratio is essential to determine the solvency since creditors and lenders are looking forward to repayments. When you borrow huge amounts, your debt ration will increase and creditors are unlikely to lend you money. A lesser debt ratio normally suggests a further solid market with the possibility of survival. This is because a firm with a more profound accumulates lesser debt levels.
Example:
David’s shop is considering renovating additional storage space at the back of his shop. He then asks the assistance of the banker if he qualifies for a new loan. The bank, in turn, conducts an assessment of his debt levels. David’s assets value $150,000, and its total liabilities of $75,000. Following the debt calculation ratio, David has a 0.05 debt ratio which is an approximately lesser ratio which conveys David’s capacity to pay off his loan.
