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Bond ratios are a representation of the percentage of the outstanding debt of a given company as related to the capitalization of the company, as of the last financial period. Often, analysts will utilize the bond ratio as a means of determining the degree of risk involved to current investors, as well as the risk that may be incurred by potential new investors in the short term.
In determining the capitalization of the company, it is a generally accepted procedure to review the current status of the bonds issued by the company. The rate of capitalization is considered equal to the amount of bonds that are due after one year, divided by that same amount, after the equity is added to the amount. Under the most favorable conditions, the bond ratio will indicate a ratio of less than thirty percent of leverage. Anything above that percentage level is considered to be highly leveraged, and may indicate the need to look very closely at the current picture before investing in the venture.
The bond ratio for a company changes as the number of issued bonds increases. For this reason, companies tend to have specific criterion in place that must be met before there will be any additional bonds issued. In fact, the current bond ratio directly impacts the investigation into the feasibility of issuing additional bonds.
While the bond ratio is not the only factor that a prospective investor will consider, it is usually a good idea to take the current status of the bonds in relation to the indebtedness of the corporation under advisement. The bond ratio can serve as a good indicator of current and anticipated performance, as well as provide a valuable road map to more details that the investor should look at in detail before committing any resources to the company. Along with being an important point of information for potential investors, the bond ratio also is an excellent measurement for current investors to monitor. The bond ratio can impact the decision to pursue additional bond issues as they are made available, or to choose to sell the current bonds and look for investment opportunities elsewhere.
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