Return On Debt (ROD)

What Is Return On Debt (ROD)?

Return on debt (ROD) is a measure of profitability with respect to a company's leverage. Return on debt shows how much the use of borrowed funds adds to profitability, yet this measurement is extraordinary in financial analysis. Analysts lean toward return on equity (ROE) or return on capital (ROC), which incorporates debt, rather than ROD.

Figuring out Return On Debt (ROD)

Return on debt is essentially annual net income partitioned by average long-term debt (beginning of the year debt plus finish of year debt separated by two). The denominator can be short-term plus long-term debt or just long-term debt. Assume a company has a net income of $50 million in a year. On the off chance that its average debt amount was $1.5 billion, the return on debt was 3.3%. This number would need to be set in setting. Was that ROD higher or lower than the last period? Were there any [nonrecurring items](/once thing) on the income statement that twisted net income during the period? Was there a change in the tax rate that caused an unusual movement in net income? Likewise, in the event that there is a material cash balance, it very well may be netted against the debt figure to determine a variation, return on net debt. This might be of more scientific value as a return metric.

ROD versus ROE and ROC

ROD is less intriguing than ROE and ROC. ROE, net income separated by shareholders' equity, is trailed by investors who need to realize how well management sends shareholder funds. ROC, net income partitioned by shareholders' equity plus debt, is a more extensive measure of management's ability to send total capital in quest for profits. Concerning ROD, the parts for these two preferred measures must be analyzed to ensure the figures are clean.