Short-Term Debts Repayment Capacity
1 Introduction
Debt is an important source of finance for many companies, and repayment capacity is an important factor that affects debt capacity. Repayment capacity is reflected in the current value of a company’s assets and future cash flow. In this article, the author will analyse the short-term debt repayment capacity of an enterprise.
2 Current Assets: The Forerunner of Short-Term Debt Repayment
Current assets are defined as assets that are liquidity, realizable and convertible into cash in the near future. The main components of current assets include cash, marketable securities and so on.
2.1 Cash
No matter how developed the banking system is, cash still plays an important role in the daily operations of a company. Companies often need to exchange goods with customers, pay suppliers or employees, purchase goods, etc. Cash is the most important short-term liquidity tool in a companys daily operations, and it is also the most reliable payment instrument.
2.2 Marketable securities
Marketable securities refer to securities with a certain liquidity and value, such as stocks, bonds, corporate notes, and bills of exchange. The value of these securities is usually much higher than cash, and some of them can be converted into cash in the short term to ensure the companys debt repayment capacity.
3 Long-term Assets and Financing
The liquidity of long-term assets is far lower than that of short-term assets. To ensure short-term debt repayment ability, long-term assets can be used to raise funds by mortgages and other means.
3.1 Bank loans
Bank loans are short-term borrowing of funds from banks, a form of short-term financing. It has certain advantages, such as low costs and short loan period. This kind of finance can also act as a supplement to the company’s own capital, helping to ensure the repayment of short-term debt.
3.2 Equity Financing
Equity financing refers to issuance of capital by the company, mainly to dilute the ownership of the existing shareholders. This type of financing is the least expensive in terms of fees and is the most beneficial to the company. Equity financing can also be used to increase the company’s cash flows, helping it to repay short-term debts.
4 Conclusion
Short-term debt repayment capacity is an important factor affecting a companys debt capacity. The current and future cash flow of the company are both important factors. A company can improve its short-term debt repayment ability by long-term assets to raise capital, such as bank loans and equity financing.
