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Return on debt definition

Description

Return on debt (ROD) is a ratio, which compares company's net earnings with the amount of long term debt. This ratio shows the amount of net earnings that is generated for each dollar that a company holds in debt. Data to calculate this ratio is collected from the income statement and balance sheet.

Return on debt (ROD) is not often used in simple analysis. This ratio is important while evaluating company’s solvency. It is generally used by company’s owners while making a decision on which financing sources would be better for the company.

Norms and limitations

Companies with a very low value of ROD can face difficulties while applying for loans.

During the economic crisis, low value of ROD indicates potential insolvency of the company which might lead to bankruptcy.

Formula

Net income (net profit, net earnings) is usually called “the bottom line”, and is a measure, which is calculated by taking revenues (sales and other incomes) and adjusting them to the cost of sales, operating cost, depreciation and amortization, interest, taxes and other expenses.

Long term debts mean loans and financial obligations lasting over the period of twelve months.