A company that issued debt prior to an increase (or decrease) in market rates experiences an economic gain (or loss) when the rates change. This economic gain or loss is not reflected in a company's financial statement. Market-value changes will not appear on the income statement or balance sheet. As a result, the book value of a company's debt will not be equal to its market value. From a company valuation point of view, the book value of equity (total assets - liability) will not reflect the current economic reality. Furthermore, if an analyst compared two companies - one that issues $1m in debt at 10% and another that issues the same debt amount at 8% three months later - the debt-to-equity ratio of both companies will be the same. However, the company that issued the debt at a lower rate will be in a much better financial position. Times interest earned and other ratios will enable an analyst to uncover these differences.


Capital And Operating Leases

Related Articles
  1. Investing

    Evaluating a Company's Capital Structure

    Learn to use the composition of debt and equity to evaluate balance sheet strength.
  2. Small Business

    Total Debt to Total Assets

    Total Debt to total assets, also called the debt ratio, is an accounting measurement that shows how much of a company’s assets are funded by borrowing. In business, borrowing is also called leverage.
  3. Investing

    Debt Ratios

    Learn about the debt ratio, debt-equity ratio, capitalization ratio, interest coverage ratio and the cash flow to debt ratio.
  4. Investing

    Understanding Long-Term Debt

    Long-term debt is any debt or liability that is due in more than one year.
  5. Investing

    The Debt Report: The Industrials Sector

    Discover how industrial companies in the United States have added more debt since the Great Recession, which could spell trouble if interest rates rise.
  6. Insights

    The National Debt Explained

    We know it's growing, but we don't know exactly how. An in-depth look why the U.S. Government's debt continues to balloon and what it all means for you.
  7. Investing

    Market Value Versus Book Value

    Understanding the difference between book value and market value is a simple yet fundamentally critical component to analyze a company for investment.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center