ROD - Return on Debt

 

What is ROD ?

 

This index expresses the percentage value of the profitability of capital borrowed (financed) to the Company by lenders and third parties.  In finance, in fact, this indicator is also considered as the average cost of pre-tax third-party means and is very important for the purposes of assessments of the economic and financial sustainability of the company as a whole. 

 

 

 

 

MONITORING LEVERAGE WITH SPREAD ROI - ROD 

 

The ROD must always be compared with the company's ROI for the purpose of a profitability analysis that considers the structural dynamics of the company as a whole.

The spread between ROI and ROD expresses the differential between the return on invested capital (ROI) and the cost of borrowed captains (ROD). And the D/E debt ratio has even a multiplier effect on both earnings and losses.


When the ROI > ROD  the company could make further investments financed with third-party capital (typically of banks) and not venture capital because only in a potential leverage situation (or positive spread of profitability), in this sense the company can be bankable. On the other hands, when the ROI > ROD, the debt ratio acts as a multiplier increasing the ROE.  This is a positive situation for the company where the company can leverage for the enterprise business.

When the ROI < ROD it means that the company is buying its resources with the capital of third parties resulting in a low profitability and in such cases the ROE decreases with the increase in the debt ratio indicated as the ratio of financial debts (capital of onerous third parties) to equity (own funds).  So that a situation where the ROI – ROD < 0 the company must focus on the use of equity as a financing capital because in a pre-existing debt situation, the latter produces only an increase in the cost of credit capital, resulting in the profitability of invested capital (ROI) and therefore its financial risk. 

 

 

 

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