Discussion in 'Economics' started by crgarcia, Mar 4, 2009.
How much debt is still acceptable to a company? (years of profits)
That depends on a lot of factors
Assuming the company plans to roll the debt perpetually, then one approximation is years_of_profit = 1/(longterm_corp_debt_interest_rate).
But the real answer depends on a lot of factors such as: 1) the effects of other income statement variables such as taxes, depreciation, dividends, etc. 2) the effects of other balance sheet terms such as the availability of liquid assets during the roll period and sufficient equity to give lenders a warm fuzzy feeling about the company. You'd also want to factor in the volatility of earnings, assets, and liabilities so that "bad luck" doesn't bankrupt the firm.
The best way to look at this is to compute the service on the debt in the context of surplus liquid assets that could help repay the debt when it is due. If that debt service consumes most of the profits of the company, then the company is in trouble.
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