Principles of Managerial Finance, 15th Edition

3.5 Debt Ratios

1. LG4

The debt position of a firm indicates the amount of money the firm uses that does not come from shareholders, but rather from lenders. In general, analysts center most on long-term debts that commit the firm to a stream of contractual payments over many years. The greater the debt, the greater is the firm’s risk of being unable to meet its contractual debt payments. Because firms must satisfy creditors’ claims before they can pay shareholders, current and prospective shareholders pay close attention to the firm’s ability to repay debts. Lenders are also concerned about the firm’s indebtedness, because holding everything else constant, a firm with more debt has a greater risk of failing to repay its lenders.

In general, ...