What could we say that the company has high leverage

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Reference no: EM131973385

However, a highly leveraged company puts the cash flows into stress as the debt has to be serviced periodically (mostly monthly or quarterly) irrespective of business's cash flow generation. If the debt service coverage ratio is not within the reasonable limit, it signifies that the business ability to repay debts as per their repayment schedule is in doubt. This would restrict banks to further extend the credit to those companies. Also, the credit rating of the company would get affected if the leverage is high.

If the ratio of equity to Assets is low, then RoA (return on Assets) would be low compared to RoE (Return on Equity). This can be observed from the formula:

RoA = Return on Assets (RoA) * Total Assets / Total Equity

Question: Reading about the high leveraged company, I would like to know what debt should be, what could we say that the company has a high leverage?

Reference no: EM131973385

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