Quote:
Originally Posted by Reporter
In business, it is considered good to have some gearing (or leverage), and there are acceptable levels of gearing for different industries.
What about for individuals and households? What is the ideal debt ratio for families?
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From What is ideal debt to equity ratio :
"It's common for large, well-established companies to have Debt-to-Equity ratios exceeding 1. For instance, GE carries a Debt-to-Equity ratio of around 4.4 (440%), and IBM around (1.3)130%." |
There is no one magic number as an ideal debt ratio. Even for businesses, their debt ratio varies according to the type of industry. For example, a utility company would necessarily have a higher debt ratio than a computer manufacturer. A utility company needs to invest heavily in capex which will last a long time and generates comparatively low margins but very stable and recurring over a long period of time. A computer manufacturer on the other hand, generates higher margins but needs to provide for product obsolescense and upgrades in machinery and their earnings are much more volatile and cannot be assumed to be recurring.
The ratio you used is not relevant for individuals because debt/equity just tells how much equity you have to buffer agst the drop in the underlying networth. A better gauge for individuals would be debt/cashflow (for companies, it is debt/EBITDA). This shows how much debt you have relative to your cashflow. Again, there is no single magic number here because a civil servant with good job security obviously can afford to have a higher debt/cashflow vs a person working in the frontline finance industry where retrenchments are par for the course. Even within the finance industry, a credit officer may be able to carry a higher debt/cashflow vs a trader due to the relative job security of a credit officer vs a trader.
In summary, a person with a higher job security and brighter job prospect can afford to carry higher debt vs the person with lower job security. That's my two cents worth of opinion anyway.