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| You need to take into account your total monthly income and fixed expenses. |
To talk about debt capacity, is first necessary to understand why people get into debt. Most of the time it has to do with a lack of knowledge about how to manage incomes; many people lack financial education and therefore do not know how to organize their expenses. Likewise, the lack of planning and use of monthly budgets can cause a person to become over-indebted.
However, not all debts are obtained by mismanagement of money and bad investments, when an individual or company wants to make an acquisition of property or another company respectively, they go into debt to acquire these features, but they do so by evaluating their debt capacity.
What does debt capacity mean?
It is one of the things you should always keep in mind when acquiring a debt or applying for a loan. In general terms, this capacity refers to the maximum amount of debt a person or company can assume and can pay in a specific period of time without jeopardizing its financial integrity.
How to calculate personal debt capacity
The debt capacity of an individual is calculated by taking into account the person's monthly fixed income and expenses. Fixed expenses may include rent, mortgage credit, food, transportation, education and even some miscellaneous expenses such as vacation and entertainment. When the total of fixed income and payments have been calculated, these two amounts are subtracted, and the result will be the total net income for the month.
Finally, the debt capacity limit is determined by multiplying that net income by 35% or 40%. The result is the amount you can use to pay off your future debt, and it is essential that you do not exceed that number.
Company’s debt capacity
In the case of corporations, there are several financial metrics with which lenders can assess a company's debt capacity to see whether it is viable to invest or lend money. First, EBITDA, Earnings Before Interest, Tax, Depreciation, and Amortization can be used to determine debt capacity. This indicator considers company's operating performance and profitability and is often used in this area since companies with higher EBITDA generate more retained earnings to pay off debts and therefore they have a higher debt capacity.
Other metrics used in these cases are balance sheets, a financial statement that shows all the company's assets and whether they have been financed by debt or equity, and cash flow statements, a measure of the cash flow generated by the regular operations of the business.
All these parameters work to calculate the amount of money that can be borrowed without any financial problems. However, doing these kinds of calculations and handling metrics may not be as simple as you think. It is always necessary to call those experts in the field who can tell you which is the right way to go and whether it is realistic to make an acquisition.
That's why Guillen Serrano & Associates offers its accounting and consulting services so that you can be ready for any financing plan and acquisition of goods or companies. Do not hesitate to communicate with them through their social networks, as they will be pleased to solve all your doubts.
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| Before making any acquisition, you must understand what debt capacity means. Guillen Serrano & Associates will explain it on today's blog! |
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