What level of debt is healthy for a business?
Taking on too much debt can make you less flexible and expose you to risk if revenues fall or interest rates rise.
Exactly what level of debt is suitable for your business depends on your precise requirements at any one time.
There is a healthy level of debt, or ‘gearing’, that enables a business to grow and capture market share.
It’s not an exact science, however, and what’s regarded as healthy will also differ from industry to industry. For example, capital-intensive industries such as manufacturing commonly have higher levels of debt than, say, a tech company that operates online.
The debt-to-equity ratio is a simple formula to show how capital has been raised to run a business. It’s considered an important financial metric because it indicates (a) how financially stable a company is when facing problems with trading or other operational considerations and (b) what ability it has to raise additional capital for growth.
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