DEFINITION of ‘Debt Load’
Debt load refers to the total amount of debt that a company is carrying on its books. This can be found on the company’s balance sheet.
BREAKING DOWN ‘Debt Load’
The best way to think about the debt load a company is carrying is in relation to its assets or equity. In absolute terms, a large company is likely to be carrying a large amount of debt. But relative to its assets or equity, the debt may be small.
A wide range of ratios are useful in determining whether a company’s debt load is too large. The simplest of these divides a company’s total debt by the total assets, giving the debt ratio. A low debt ratio is usually a sign of a healthy company. But what is considered low? That depends on the size of the company and its industry. To determine whether a company’s debt load is too large or about right, compare it with similarly sized companies in the same industry.
Another useful ratio is the debt to equity ratio. To calculate this, divide the total debt by the total equity. Again, whether this figure is too large or about right depends on the size of the company and the industry.
A company’s debt load may also be assessed in relation to its income. In this case, the debt service coverage ratio, which compares a company’s operating income, that is, income generated by normal operation, to its debt payments, is useful. The interest coverage ratio, which compares just interest payments to operating income, is also helpful.