FFO-to-Debt ratio (2024)

FAQs

FFO-to-Debt ratio? ›

Funds from operations (FFO) to total debt is a leverage ratio that is used to assess the risk of a company, real estate investment trusts (REITs) in particular. The FFO to total debt ratio measures the ability of a company to pay off its debt using net operating income alone.

To calculate the net FFO, one must add the non-cash expenses or losses that are not actually incurred from the operations, such as depreciation, amortization, and any losses on the sale of assets, to net income. Then subtract any gains on the sale of assets and interest income.

However, a healthy ratio would generally fall between 1.0 and 2.0, with anything above 2.0 being considered very strong. This indicates that the company has more than enough operational cash flow to cover its total debt.

FFO-to-Debt = FFO / Total debt

A type of leverage ratio which measures a firm's FFO to its total debt. A higher ratio indicates more cash flow to service debt, and hence lower credit risk.

Generally, a good debt ratio is around 1 to 1.5. However, the ideal debt ratio will vary depending on the industry, as some industries use more debt financing than others. Capital-intensive industries like the financial and manufacturing industries often have higher ratios that can be greater than 2.

For corporations, the credit agency Standard & Poor's considers a company with an FFO to total debt ratio of more than 0.6 to have minimal risk.

Be sure you're comparing the dividend to FFO, not to a REIT's net income. REITs tend to have higher-than-average payout ratios, and 70–80% of FFO is common. But if this percentage is too close to (or higher than) 100%, a dividend cut could be on the horizon.

35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.

By calculating the ratio between your income and your debts, you get your “debt ratio.” This is something the banks are very interested in. A debt ratio below 30% is excellent. Above 40% is critical.

To have a healthy free cash flow, you want to have enough free cash on hand to be able to pay all of your company's bills and costs for a month, and the more you surpass that number, the better. Some investors and analysts believe that a good free cash flow for a SaaS company is anywhere from about 20% to 25%.

Is 0.7 a good debt-to-equity ratio? ›

What is a bad debt-to-equity ratio? When the ratio is more around 5, 6 or 7, that's a much higher level of debt, and the bank will pay attention to that. “It doesn't mean the company has a problem, but you have to look at why their debt load is so high,” says Lemieux.

What counts as a good debt ratio will depend on the nature of the business and its industry. Generally speaking, a debt-to-equity or debt-to-assets ratio below 1.0 would be seen as relatively safe, whereas ratios of 2.0 or higher would be considered risky.

Interpreting the Debt Ratio

If the ratio is over 1, a company has more debt than assets. If the ratio is below 1, the company has more assets than debt. Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low.

According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance. Private mortgage insurance.

The debt-to-equity ratio measures how much debt a company has relative to its shareholders' equity. It indicates how much leverage a company is using to finance its assets and operations. A high debt-to-equity ratio means that a company has more debt than equity, which implies a higher risk of default and insolvency.

What Is the Bad Debt to Sales Ratio? This ratio measures the amount of money a company has to write off as a bad debt expense compared to its net sales. In other words, it tells you what percentage of sales profit a company loses to unpaid invoices.

FFO is calculated by adding depreciation, amortization, and losses on sales of assets to earnings and then subtracting any gains on sales of assets and any interest income.

Term. FFO Payout Ratio, Total -%

It is obtained using Dividends per Common share divided by Funds from Operations per share.

3. How do you calculate debt to net worth ratio? The debt to net worth ratio can be calculated by dividing total liabilities by net worth.

Simple Leverage Ratio: Debt-to-Asset

This ratio shows how much a company uses debt to finance its assets. You can calculate this metric by dividing the total debt—both short-term and long-term, by total assets.