Capacity:
It refers to the study of the possibilities of the company to cover its short and long-term debts. Short-term debts are covered through the use of current assets (cash, cash, banks, accounts receivable) and are calculated using the following relationship.
Current Assets / Current Liabilities
This ratio must be greater than 1 because there must always be an adequate margin to cover the immediate payment needs that must be incurred.
Long-term debt service capacity is based on profits expected to be obtained from sales when the project enters its normal phase of operation.
The expected earnings set the debt limits and the terms of the payments of the principal and interest.
This long-term payment capacity is made up of profits and expenses, which do not represent disbursements, such as depreciations and is measured through the debt coverage index.
In short, it will be the profits achieved in the year after deducting the payment of taxes, the participation of workers, the distribution of profits, etc., which allow us to cover to a large extent the funds necessary to pay the debt.
The debt coverage index is the relationship that exists between the company's availabilities that come from profits plus expenses, which do not represent disbursements, compared to long-term loans plus interest.
As an example we would have:
Net operating income
+ Expenses that do not represent disbursements
- Distributed profits
- Tax on the sales
- Requirements of working capital
Availability for debt service.
Debt coverage ratio = Debt service availabilities / Principal installment + interest on long-term loans
A ratio greater than 1 will indicate that the project has the capacity to pay the debt.
Other indices:
The establishment and classification of the accounts of assets, liabilities, sales, collections, utilities, among others, allow us to establish certain relationships or comparisons, which are known by the name of indices, of which we will quote some of the most used, briefly explaining the justifications for its use.
It indicates the possibility of payment, which a company has to cover its payable obligations in a short enough period. The relationship must be 1 or more, which would explain why there is 100% feasibility to cover the enforceability of the obligations.
Total capital / Total liabilities
It reflects the degree of dependency between shareholders, third parties or creditors, indicating the credit capacity and visualizing the dependence of the owners of the capital vis-à-vis the lenders. If this ratio were, for example, 2, it would be that the shareholders have invested twice as many creditors.
Capital / Total assets
This quotient explains that part of the investments were financed with capital, or in other words, to what extent the shareholders own the company.
Total liabilities / Total assets
This relationship explains the extent to which creditors affect the financing of the company.
It is used to determine the amount of resources available in the short term to meet normal business operations or a production cycle, this indicator is related to the credit rating of a company.
It indicates the number of times the merchandise is rotated or the number of times it is bought or sold in periods generally of one year.
The turnover rate is an indicator that reflects administrative capacity; the higher the rotation, the higher the profits
Gross Profit / Net Sales
This relationship explains the margin between the cost of the merchandise and the sale price.
Net profit / Sales
Explain the margin of significance or importance that prices and costs have, since when the index is high, the sale prices are relatively high or their costs are low. This index is of great importance for the internal control of the company.
