What level of debt is healthy for a business?

Updated: 4th February 2021

Taking on too much debt can restrict a company’s operational flexibility, leaving it open to financial problems should revenues drop. But there is a ‘healthy’ level of debt, or ‘gearing,’ that allows companies to fulfil their strategic plans and thrive in the long-term.

This can be a fine balance, however, and what is regarded as ‘healthy’ can be different for businesses across various industries. So what level of debt could be regarded as healthy for your business, and how is this determined?

Using debt ratios to establish a healthy level of debt

A company’s debt-to-equity ratio is commonly seen as a measure of its stability. The ratio measures the level of debt taken on by the company in order to finance its operations, against the level of capital, or equity, which is available.

The resulting percentage figure shows how much the company relies on debt, with higher percentages indicating a greater reliance on external funding, and therefore potentially reduced stability in the face of trading or other operational problems.

Good and bad debt ratios

Arriving at a debt ratio is not an exact science, however, and many variables affect the outcome and how it might be viewed by stakeholders and investors. These factors can include the nature of the business itself, the industry in which it operates, and its previous trading history.

Commonly, a debt ratio of one or less indicates stability, and the ability of the company to continue operations relatively unhindered by the risk of default due to excessive debt. That is not to say that any debt ratio exceeding 1% indicates an unhealthy level of debt.

For some companies, taking on a higher level of debt can form part of wider expansion plans. Taking a long-term view for growth may involve additional debt, and the generally low cost of borrowing and the return it provides, may be deemed worthwhile by the management.

What can affect the stability of companies with debt?

  • A downturn in the market, wider global recession, or other external factors could impede trade and increases the likelihood of the company defaulting on its debt repayments
  • New legislation, whether related to the industry or general policy such as the introduction of the National Living Wage, or auto-enrolment
  • A rise in interest rates, or inflation
  • New competitors or innovations in the industry
  • Internal factors such as ineffective systems and procedures, or lack of investment in technology

Some industries, including construction and telecommunications, naturally require higher levels of debt to operate effectively day-to-day. This is why when you calculate your debt-to-equity ratio, you’ll need to compare the result with similar companies operating in the same sector for it to be of true value.

Risks of taking on too much debt

If you have provided personal guarantees for any of your company’s borrowing, and the business subsequently declines, you may become liable for the total amount remaining if the company is unable to meet the repayments.

If you would like more information on establishing a healthy level of debt in your business, call one of our experts at Begbies Traynor. We are the UK’s largest professional services consultancy, and will provide the guidance you need to successfully leverage your business.  Call for a free consultation – we work from 70+ offices around the country.

Network of Over 100 UK Offices

Find your local Begbies Traynor Group office and speak to an adviser today.

Find your Local Office
0800 063 9221

Call our Confidential Advice Line. Calls to this number are free of charge.

Call us now...
Request a Meeting

We invite you to come and discuss your enquiry with us at your convenience.

Request a meeting...
0800 464 0871

Call our Confidential Advice Line. Calls to this number are free of charge.

Call us now...
Request a Meeting

We invite you to come and discuss your enquiry with us at your convenience.

Request a meeting...
0161 837 1700

Call our Confidential Advice Line. Calls to this number are free of charge.

Call us now...
Request a Meeting

We invite you to come and discuss your enquiry with us at your convenience.

Request a meeting...
Begbies Traynor Group plc, announces that it has completed the acquisition of CVR Global LLP
CVR is a leading independent firm of insolvency practitioners, forensic accountants and experts in other related complementary disciplines.
Read More →
Coronavirus pushes financially distressed companies over the half-million mark
Number of businesses in significant distress stands at 509,000 – the highest number measured by the Red Flag Alert research
Read More →
BTG Advisory accelerates growth with appointment of four new partners to its London office
BTG Advisory, the boutique advisory arm of Begbies Traynor Group announces the appointment of four new partners to its Canary Wharf office
Read More →
Eighty jobs saved with £1m sale of engineering business
South Yorkshire company Newburgh Precision rescued through administration
Sale enables 75-year-old business to continue trading
Read More →
Join thousands of professionals by signing up for our updates
Analysis and Opinion from our Partners
Top Industry News
Register Now →

Advice you can trust

We are accredited by the following industry leading organisations

Insolvency Practitioners Association Institute of Chartered Accountants in England and Wales R3: Association of Business Recovery Professionals ICAEW Business Advice Service Turnaround Management Association ICAS | The Institute of Chartered Accountants of Scotland

Contact the Begbies Traynor Group team

or Find your Nearest Office

Here at Begbies Traynor Group we take your privacy seriously and will only use your personal information to contact you with regards to your enquiry. We will not use your information for marketing purposes. See PRIVACY POLICY


This site uses cookies to monitor site performance and provide a more responsive and personalised experience. You must agree to our use of certain cookies. For more information on how we use and manage cookies please read our PRIVACY POLICY