Listen to a Business English Dialogue About Long term debt ratio
Paisley: Hey Jimmy, do you know what the long term debt ratio means in finance?
Jimmy: Hi Paisley! Yes, the long term debt ratio is a measure of a company’s long-term financial stability, calculated by dividing long-term debt by total assets.
Paisley: That sounds important. What does a high long term debt ratio indicate for a company?
Jimmy: A high long term debt ratio suggests that a company relies heavily on debt to finance its operations and investments, which can pose risks in terms of repayment obligations and financial flexibility.
Paisley: I see. And what about a low long term debt ratio?
Jimmy: A low long term debt ratio indicates that a company has less reliance on debt financing, which may signal financial strength and stability, as it can imply lower interest expenses and less financial risk.
Paisley: That makes sense. How do investors use the long term debt ratio when evaluating companies?
Jimmy: Investors often use the long term debt ratio to assess a company’s leverage and financial risk. A lower ratio may be preferable to investors as it suggests a healthier balance sheet and less risk of default.
Paisley: Got it. Are there any limitations to using the long term debt ratio as a performance metric?
Jimmy: Definitely. The long term debt ratio doesn’t provide insight into the company’s ability to generate profits or cash flow, so it’s important for investors to consider other financial metrics alongside it for a comprehensive analysis.
Paisley: Thanks for explaining, Jimmy. The long term debt ratio seems like a useful tool for evaluating a company’s financial health.
Jimmy: No problem, Paisley. If you have any more questions about business and finance, feel free to ask!