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Five Debt Management are:

I-    Full Debt Management (100%):

Full Debt Management is at huge risk. When the business loses, it will be passive and be easily bankrupted.

II-   High Percentage Debt Management (70%):

High Percentage Debt Management is also at the huge risk. If the business management is poor, it may cause the bankruptcy. In order to rescue the business crisis, we should increase the capital.

III-  Appropriate Percentage Debt Management:

The capacity of debt is completely depending on the demand of the business. In general, the ratio of the proper debt management and total investment is approximately between 40% - 50%. In short, it’s less risky and more stable.

IV-  Low Percentage Debt Management:

The ratio of total debt management and total investment is around 20%, the capacity of debt is small and less risky. 

V-   Non-Debt Management:

Total investment completely depends on their own capital. It’s non-debt and no risk but the business is hard to expend.

Analysis of the Debt Capacity:

With the economic growth and the demand of the market, we urgently need more capital to invest on a new business, new equipment, raw material and building, we, however, should make the budget for using the money that we have borrowed from the bank, otherwise, we, due to the excessive debt and poor management, will be bankrupted.

The debt capacity is usually divided into two kinds:

1-        Short-term debt

2-        Long-term debt

The debt management has the maturity date, a certain amount. In short, we have to pay the interest and principle in accordance with the stipulation in the loan contract. If we default, it may easily affect our business reputation. When the debt capital will be increased, the profit must be less and less. In conclusion, the profit gained from debt management must be more than the debt capital; debt capital increases, the profit decreases.

According to the financial research, I think the proportion between current assets and current debt is 2:1 (short-term debt). If the current rate is too high, it is also not a good sign. That means the business is not operated well. As for long-term debt, the proportion between current debt and current asset is 1:1 (50% each).

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