- posted 10 years ago
The debt/equity and leverage ratio are both measures of liabilities, and they both take balance sheet items. The debt/equity geometric average (the sum of the all the debt of the companies divided by the sum of book values of all the companies) is about 0.71, and the geometric average (the sum of all the corporation's assets divided by the sum of all the book value of all the companies) of the leverage ratio is 2.42 for the 2794 publicly traded companies in the USA.
I am interested in comparing certain indebtedness ratios of the 2794 corporations with that of the US Government (USG). However, there are only a few analogies in which to draw conclusions.
For example, the Debt/GDP of the USG is analgous to the total Debt/ Revenues of the corporations. However, I noticed that the Debt/ Revenues is not widely used at all. I realize that this ratio has income statement and balance sheet metrics in it. But I think that it's quite useful, because debt is funded from revenue. As an FYI, the Debt/GDP and Debt/Revenue of the USG and US Corporations are: 0.671x for USG (from wikipedia.org) and 0.34x for US Corporations.
Why isn't Debt/Sales or Sales/Debt not more widely used than debt/ equity or interest coverage ratio? IMHO, Debt/Sales or Sales/Debt is a more "unrefined" measurement than the interest coverage ratio which takes EBIT/InterestPayments.
Interest payments is less fundamental of the debt. Debt dictates interest payments. Interest payments is less than the total debt.
EBIT is less fundamental than Sales. Sales dictates EBIT. EBIT is less than total revenues (or sales).
Therefore, my proposed ratio, the Sales/Debt, should provide a wealth of information that EBIT/InterestPayments provide.