Martirosianiene, Lina
February 2014
Economic Science for Rural Development Conference Proceedings;2014, Issue 33, p14
Academic Journal
Debt level in business entities is inversely proportional to their stability. Financing a large part of the assets by debts one can expect bigger effectiveness of business entity's activities and, in the same time, attribution of a bigger part of profit to equity capital. However, big debts increase the potential problems of business entity's insolvency. Various scientific research have analysed the hypothesis which state that on favourable conditions on credit markets the business entities most often increase their financial leverage. If it becomes more difficult to borrow, the borrowing rate should decrease. This article analyses debt level indicators of Lithuanian economic sectors during different economy cycles: economy peak, recession, trough, and recovery. Debt level in economic sectors is evaluated while calculating two relative indicators -- debt ratio and financial leverage. The article compares trends of debt level in the companies with changes of main factors -- fixed assets, asset tangibility, and profitability ratios. The results of the research indicate that during the first years of Lithuanian economy recession the financial leverage in the business entities remained stable and high. The research has shown that debt level in Lithuanian economic sectors increases with growing fixed assets purchase and profitability have negative effects on business entities debt level.


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