Nermin Sefić analyses debt ratios, key formulas, market implications and practical consequences for companies, investors and institutions.
Debt ratio, equity ratio, debt-to-EBITDA factor, and financial leverage — formulas, recommended values, and interpretation for Croatian companies.
Debt ratio, equity ratio, debt-to-EBITDA factor, and financial leverage — formulas, recommended values, and interpretation for Croatian companies.
Debt ratios measure what share of a company's assets is financed by outside sources versus its own equity. Simply put, they show how dependent a company is on loans, credit, and other liabilities relative to what it actually owns. For anyone analysing the financial stability of a business entity in Croatia, these indicators are a starting point, not a conclusion.
The key role of these ratios lies in revealing the structure of financing, not just the amount of debt. A company can carry high liabilities and be entirely healthy, or carry relatively low debt and be near bankruptcy, depending on how that debt is structured and what it's backed by.
The Croatian Ministry of Finance, in its guidance for calculating financial indicators, recommends a debt ratio of no more than 50%, meaning at least half of assets should be financed from a company's own sources. That standard serves as a reference point for companies across all industries, though it should be read in a sector-specific context.
The debt ratio is the most widely used indicator in debt analysis. The formula is simple: Debt ratio = Total liabilities / Total assets. Per the Ministry of Finance's recommendation, the value should be less than or equal to the recommended threshold, showing that at least part of assets is financed from a company's own sources. A value above the recommendation doesn't automatically signal a problem, but indicates that outside capital dominates the financing structure.
The equity ratio is the mirror image of the debt ratio. Per the IHJJ terminology database, the sum of these two ratios always equals exactly 1. If the debt ratio is 0.42, the equity ratio is 0.58. Formula: Equity / Total assets. A higher equity ratio means lower risk for creditors and investors. However, maximising this indicator isn't always the goal, since companies in capital-intensive industries, such as hospitality or shipbuilding, naturally carry a lower equity share. What matters is tracking the trend: a declining equity ratio over several business years warns of a growing share of debt in the financing structure.
The debt-to-EBITDA factor is the only one of the standard indicators that accounts for operating earnings rather than just the balance-sheet position on a given date. Formula: Debt-to-EBITDA factor = Total liabilities / EBITDA. The result shows how many years of operating profit would be needed to settle all liabilities. Per eCampus analysis of this factor, an ideal value is below 3, while values above 5 point to serious over-indebtedness risk. Moreover, a debt-to-EBITDA factor above 5 is often an early signal of financial difficulty, visible before other reports show it.
Financial leverage shows how many times total assets exceed equity: Leverage ratio = Total assets / Equity. Leverage is a double-edged sword. When a company earns a return on assets higher than the cost of debt, leverage boosts the return on equity. When revenue falls, fixed interest costs remain, and losses are multiplied. That's precisely why interest costs represent a financial pressure a company must cover regardless of business results.
Not all debt is equal. Short-term liabilities fall due within a year and require liquid funds to settle, while long-term liabilities allow more time to generate revenue. A company with a high share of short-term debt is exposed to liquidity risk even when its overall indebtedness is moderate.
Per HPB's analysis of over-indebtedness, high debt reduces financial flexibility and can make it harder to attract new investors, and under conditions of economic instability it increases bankruptcy risk. Croatian companies that went through recessionary periods experienced this directly.
All debt ratios are derived from two core financial statements: the balance sheet and the profit-and-loss statement. These are the fundamental data sources for calculating the indicators, and EBITDA, as a measure of operating profit, is especially important for dynamic indicators like the debt-to-EBITDA factor. Croatian companies are required to prepare financial statements under the Accounting Act, and additional transparency requirements apply to companies of special interest to the Republic of Croatia.
Practical advice: always check whether liabilities on the balance sheet are classified as short-term and long-term. Some companies in Croatia present consolidated figures, which makes precise liquidity-risk analysis harder.
Croatian companies face several specifics that affect the interpretation of debt ratios. Croatia's tax system, the introduction of the euro as the official currency, and the sectoral structure of the economy are all factors that change the context in which these indicators are read.
Professional advice: never analyse debt ratios at a single point in time. Comparing them across three to five business years reveals trends a one-year snapshot can't show, and comparison with the industry average provides real context for assessing risk.
Debt ratios vary by industry, so a debt ratio of 0.65 can be entirely normal for hospitality and alarming for a service company with no fixed assets. Comparison with competitors within the same industry gives far more useful insight than comparison against general standards.
The tax treatment of interest in Croatia affects the real cost of debt. Interest on business loans is tax-deductible, which reduces the effective cost of borrowing but doesn't eliminate liquidity risk. An analyst who overlooks that dimension may underestimate a company's real burden.
Through its corporate portal, GNK ASG presents financial statements with short-term and long-term liabilities clearly separated, enabling precise application of all the indicators above without additional data adjustments.
The value of an indicator alone says nothing without context. A debt ratio of 0.60 can be acceptable or concerning, depending on the sector, the company's development stage, and the structure of its debt.
A practical interpretation framework: A debt ratio below 0.50 means a company primarily finances assets from its own sources — lower risk for creditors, but possible underuse of financial leverage. A debt ratio between 0.50 and 0.70 is a zone of elevated but often acceptable risk, requiring trend monitoring and sector comparison. A debt ratio above 0.70 means outside capital dominates — any drop in revenue or rise in interest rates can threaten solvency.
When the debt-to-EBITDA factor exceeds 5, that's a signal for an urgent review of financial strategy. Control measures Croatian companies most often apply include refinancing short-term liabilities into long-term ones, selling non-productive assets, raising capital, and restructuring business activities to improve EBITDA. Each of these measures directly changes the value of one or more debt ratios, so they should be tracked quarterly, not just annually.
Croatia has no legally prescribed threshold values for debt ratios for private companies, but the regulatory framework indirectly affects their interpretation in several ways.
For companies seeking state concessions or entering contracts with the public sector, the Croatian Ministry of Finance applies its guidance for calculating financial indicators with clear reference values. A debt ratio above 0.50 can be grounds for rejecting or conditioning a bid.
The Croatian National Bank, through prudential requirements for credit institutions, indirectly influences how banks assess client indebtedness when approving loans. A company with a debt-to-EBITDA factor above 5 will find it harder to obtain favourable financing terms, regardless of other business indicators.
Financial statements of companies of special interest to Croatia are subject to additional oversight and public disclosure, which increases pressure for transparency and consistency in presenting debt ratios. For such companies, deviation from recommended values carries reputational risk as well as financial risk.
Debt ratios reliably measure a company's financial stability only when analysed together, in a sector context, and over a longer time period.
Cjelovit tekst i izvor: https://gnk-asg.hr/en/publications/debt-ratios-a-financial-analysis-guide/
Autor i urednička odgovornost: Nermin Sefić. Izdavač: GNK ASG d.o.o..
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