"Debt-load analysis" is a general concept for both households and companies to determine what amount of debt is "good" under different circumstances. A balance must be struck between debt and income, so that either the person or the firm can take advantage of debt without having it harm your financial prospects. This balance is really the foundation of debt management.
Debt-load Analysis
"Debt load" is a ratio between total debt against assets. Even non-performing assets, assets that do not produce a money income, are still relevant to the load equation because they can be liquidated. Debt can be good if it is used to expand your purchasing power, bad if it takes up a large chunk of your income in payments and interest. Simply put, a debt-load analysis is a measure of how much debt you can "carry" before it becomes a liability.
Types of Debt
Scott Bilker, a financial planner writing mostly for individuals, holds that the understanding of "debt load" is a relative measure. Debt can include secured or unsecured debt, meaning that the debt can be based on collateral or, in the case of unsecured debt, on your relationship with the bank. The main issue in general debt management is to use debt to your advantage. For a firm, leveraging for further expansion is a good thing for stockholders, who consider this indicative of future gains. For individuals, debt can create financial discipline, expand on earned income, and help create a good credit history.
Debt-load Analysis for Individuals
For individuals, the basic factors in figuring the optimal debt load are one's income, assets, interest payments, minimum monthly payment, percentage of secured debt and general financial discipline. For example, a fairly small, yet secured, amount of debt is more problematic than unsecured, since the creditors can seize this secured property. Debt can be more or less seriously based on the interest charged. If your income has been diminished then the same amount of debt now becomes relatively larger. Debt-load analysis, therefore, must take all of these variables into consideration. These variables lie at the heart of debt management.
Debt-load Analysis for Firms
Optimal debt percentages for firms can be derived from the general risk of the firm's operations, tax liabilities, firm flexibility and the nature of management. Since interest is tax deductible, some debt is good if taxes are high. Flexibility refers to the ability of the company to raise capital in uncertain times, and is based on the theory that established and stable firms can and should carry a moderate amount of debt so as to leverage continued growth and expansion.
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