Debt-to-Equity Ratio measures a company’s overall financial health. Typically, a value of 0.5 or less is deemed satisfactory, while any value that is higher than 1 indicates that a company is indebted.
What are the strategies that companies can execute in order to improve their debt-to-equity ratio?
Table of Contents
Increase Equity
The most rational step a company can take to improve the debt-to-equity ratio is to increase revenue.
As the company’s equity increase, the money returns back to the company by adding to the assets or paying debts – which helps maintain the ratio on a stable and good value.
This can be done by raising prices or minimizing the costs.
Expansion and Debt
This strategy refers to borrowing money to fuel expansion. While it can possibly aid with the company’s growth, too much debt, however, enthralls risk.
It can be challenging to sustain a debt-fueled development indefinitely, but debt financing can also be helpful to help the company grow and expand its operations.
As long as the debt remains manageable, it can be an effective way to fuel growth and expansion.
Effective Inventory Management
This measure can be taken by maintaining a sufficient level of inventory. It is important to avoid having an unnecessarily high level of inventory that is beyond what is required based on the customer’s needs.
This strategy helps prevent waste of cash flow. The extra cash generated from minimizing inventory can be used to pay off debts.
Debt Restructuring
This process allows companies to renegotiate existing debts. Debt restructuring gives companies the chance to improve or restore liquidity so it can continuously operate.
This is typically carried out by reducing the interest rates of the loan, providing extension on which the company’s liabilities are due, or both. This step increases the company’s chances of getting the debts paid which results in an improved debt-to-equity ratio.
