When examining the health of your business, it’s critical totake a long, hard look at your debt-to-equity ratio. If your ratiosare increasing–meaning there’s more debt in relation toequity–your company is being financed by creditors rather than byinternal positive cash flow, which may be a dangerous trend.
You can avoid growing yourself out of business by sticking toyour affordable growth rate. Your affordable growth rate is tied toyour firm’s assets. The basic idea is that your sales shouldn’tgrow more quickly than your assets. As a rule, this means if yoursales double, your assets–including inventory, receivables andfixed assets–should also double. Assets are important because yourlender may be unwilling to loan you any more money if yourdebt-to-equity ratio exceeds a certain figure. If sales and assetsgrow at the same rate, your debt-to-equity ratio should remainwithin the lender’s limit, allowing you to borrow to finance growthforever.
