Ideal Debt Ratio - Salary.sg Forums
Salary.sg Forums  

Go Back   Salary.sg Forums > The Salary.sg Discussion Forums: > Investments and Net Worth

Investments and Net Worth Talk all about money making exploits, shares, property, building net worth and retirement matters




Ideal Debt Ratio

Reply
 
Thread Tools
  #1 (permalink)  
Old 20-09-2013, 10:12 AM
Junior Member
 
Join Date: Jun 2009
Posts: 8
Reporter is on a distinguished road
Default Ideal Debt Ratio

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?

-

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%."



SG BusLeh mobile app
SG BusLeh - the best bus app - available on iPhone and Android


SGX Stocks Android App - check share prices
SGX Stocks [Android] App - check latest share prices on the go


SGX Stocks for iPad - check latest Singapore share prices
SGX Stocks [iPad] app
| SGX Stocks [iPhone] app
Reply With Quote
  #2 (permalink)  
Old 20-09-2013, 10:59 AM
whizzard's Avatar
Millionaire Member
 
Join Date: Feb 2010
Location: Bkt Timah
Posts: 86
whizzard is on a distinguished road
Default

Quote:
Originally Posted by Reporter View Post
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?

-

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.

Reply With Quote
  #3 (permalink)  
Old 20-09-2013, 11:04 AM
Unregistered
Guest
 
Posts: n/a
Default

Quote:
Originally Posted by whizzard View Post
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.
thanks for sharing your thoughts. so, suppose one is holding a semi stable job, say between civil service and MNC middle management in non-sales, and has a cashflow of 100k and net worth of 1m. is a debt of 500k ok? how about 1m? or even 2m?

Reply With Quote
  #4 (permalink)  
Old 20-09-2013, 11:32 AM
Unregistered
Guest
 
Posts: n/a
Default

An ideal debt amount a person can take depends on his ability to service the debt as well on his current net worth position. A person with a net worth of $3m and another person with a net worth of $300k should see a $1m mortgage differently, even though both have the same salary, job stability and are of the same age. In the worst case scenario, the person with higher net worth can easily sell off his assets to pay off the $1m mortgage.

So, a rich person can have a higher debt than a poor person.

The problem with today's young professionals is they take on too much debt, justifying their actions based on their income. Since young people nowadays are paid highly, they become over confident and start buying condo, sports car, branded goods, go for expensive holidays, etc. Many find themselves unable to manage their debt and end up declaring bankruptcy.

If you are young and has a household income of $200k, the best is to stay in a 3 room HDB flat. Save up enough cash. Then when you sell your flat, make sure if you are buying a $1m condo, your downpayment should be $600k. Borrow only $400k.
Reply With Quote
  #5 (permalink)  
Old 20-09-2013, 11:58 AM
Unregistered
Guest
 
Posts: n/a
Default

I vary mine between 20-30%. 20% when I think markets are peaking and 30% when they are crashing. I have about $20m
Reply With Quote
  #6 (permalink)  
Old 20-09-2013, 12:19 PM
Unregistered
Guest
 
Posts: n/a
Default

Quote:
Originally Posted by Reporter View Post
"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%."
GE has a large financial services component that takes deposits. Most banks have debt to equity of 5-10 because of that. So you can't compare financial services type companies to normal industrial companies.

IBM is an asset light company. It generates remarkable net income for it's balance sheet size, hence debt/equity is not relevant. If you look at its debt/free cash flow, it's less than 2x and it has interest coverage of debt of over 50x.

If you are a loanshark, then you would have an incredibly high debt/equity ratio like GE

If you are a a fresh Harvard MBA who just got a job earning $500K out of college, but your only asset is a $200K BMW, now depreciated to $140K, that you took a $180K loan for. Your debt/equity is 1.3x but you are in an excellent position.
Reply With Quote

  #7 (permalink)  
Old 20-09-2013, 12:53 PM
Unregistered
Guest
 
Posts: n/a
Default

Quote:
Originally Posted by Unregistered View Post
thanks for sharing your thoughts. so, suppose one is holding a semi stable job, say between civil service and MNC middle management in non-sales, and has a cashflow of 100k and net worth of 1m. is a debt of 500k ok? how about 1m? or even 2m?
Nowadays, earning $100k pa is nothing, having net worth of $1m is also nothing.
You should only take a loan of $300k the max.

For me, my net worth is $5m and I have no debt at all.
Reply With Quote
  #8 (permalink)  
Old 20-09-2013, 11:23 PM
Unregistered
Guest
 
Posts: n/a
Default

Quote:
Originally Posted by Unregistered View Post
Nowadays, earning $100k pa is nothing, having net worth of $1m is also nothing.
You should only take a loan of $300k the max.

For me, my net worth is $5m and I have no debt at all.
$5m is nothing. no debt is also nothing.
Reply With Quote
  #9 (permalink)  
Old 29-06-2014, 05:47 PM
Unregistered
Guest
 
Posts: n/a
Default

Do you know generally how much debt do normal graduate couples have as a percentage of their net worth? Eg for a couple with combined net worth of 3m, is a debt of 1m normal or too much?
Reply With Quote
  #10 (permalink)  
Old 29-06-2014, 06:56 PM
Junior Member
 
Join Date: Jun 2014
Posts: 6
mchan is on a distinguished road
Default

Quote:
Originally Posted by Unregistered View Post
$5m is nothing. no debt is also nothing.
Very profound !
Reply With Quote
Reply

Bookmarks

« Previous Thread | Next Thread »
Thread Tools

Posting Rules
You may not post new threads
You may post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are On
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Click Here If You Are Seeking Help With Debt Consolidation [email protected] General Discussions 0 10-07-2013 05:22 PM
Latest Debt Restructuring Packages (Don't Miss!) [email protected] Marketplace and Find Work 0 07-06-2013 05:58 AM
Can you Afford that Condo? Introducing the Debt Ratios Salary.sg Investments and Net Worth 3 04-08-2009 10:21 AM
HDB Condo Ratio Salary.sg Investments and Net Worth 4 28-12-2008 10:21 PM

» 30 Recent Threads
Job offer from Apple ( 1 2 3... Last Page)
313 Replies, 53,710 Views
Exxon Mobil Equipment tech or... ( 1 2 3... Last Page)
1,741 Replies, 489,181 Views
Anyone jobless for a long time... ( 1 2 3... Last Page)
2,591 Replies, 975,484 Views
MINDEF DXO (All FAQ on it) ( 1 2 3... Last Page)
2,893 Replies, 1,746,839 Views
Career as Teacher ( 1 2 3... Last Page)
2,043 Replies, 1,380,102 Views
DBS Management Associate Program... ( 1 2 3... Last Page)
1,170 Replies, 203,234 Views
DBS Graduate Associate Program ( 1 2 3... Last Page)
614 Replies, 310,320 Views
Factual Local Bank Salaries - DBS... ( 1 2 3... Last Page)
41 Replies, 45,000 Views
Civil Service Performance Bonus ( 1 2 3... Last Page)
1,254 Replies, 1,018,119 Views
How much are you earning per annum? ( 1 2 3... Last Page)
11,853 Replies, 3,610,606 Views
Which degree is the best return on... ( 1 2 3... Last Page)
31 Replies, 7,758 Views
Civil Svc/ Statboard - Typical... ( 1 2 3... Last Page)
1,768 Replies, 829,722 Views
ST Electronics ( 1 2 3... Last Page)
382 Replies, 170,529 Views
MasterCard Graduate Developement...
8 Replies, 2,756 Views
Roles in accenture singapore ( 1 2 3... Last Page)
288 Replies, 226,495 Views
Govtech bonus ( 1 2 3... Last Page)
30 Replies, 12,375 Views
Constituency Manager (People... ( 1 2 3... Last Page)
832 Replies, 418,749 Views
Lawyer Salary ( 1 2 3... Last Page)
4,865 Replies, 2,103,730 Views
Need career advice
4 Replies, 785 Views
SPF (Direct-Entry Inspector)
9 Replies, 1,161 Views
is it crazy to give up a 100k P.A... ( 1 2 3)
27 Replies, 21,759 Views
Career switches - job options and... ( 1 2)
13 Replies, 2,353 Views
OCBC Young Bankers Programme ( 1 2 3... Last Page)
97 Replies, 71,152 Views
AML/Compliance/KYC professionals... ( 1 2 3... Last Page)
1,370 Replies, 538,803 Views
Job search for returning...
1 Replies, 326 Views
Infineon Technologies
1 Replies, 249 Views
Queries about Cpib application ( 1 2 3... Last Page)
1,065 Replies, 473,576 Views
Singtel Management Associate... ( 1 2 3... Last Page)
117 Replies, 76,708 Views
Schneider Electric - EGP (Grad... ( 1 2 3... Last Page)
39 Replies, 13,677 Views
SIM-UOL fresh grad starting pay ( 1 2 3... Last Page)
2,554 Replies, 1,221,018 Views
Powered by vBadvanced CMPS v3.2.2



All times are GMT +8. The time now is 02:39 PM.


Powered by vBulletin® Version 3.8.5
Copyright ©2000 - 2020, Jelsoft Enterprises Ltd.
Content Relevant URLs by vBSEO 3.3.2