What can a company do if its debt ratio exceeds 50%?

When a company's debt ratio exceeds 50%, it indicates that more than half of its assets are financed through debt. This situation raises concerns about financial stability, as higher debt levels can lead to increased risk, particularly if cash flows are not sufficient to cover interest payments.

To address this, a company can decrease its reliance on debt financing. This can be achieved through several strategies such as paying down existing debt, increasing equity financing, or retaining earnings instead of taking on additional debt. By reducing the proportion of debt in its capital structure, the company can improve its overall financial health and reduce the associated risks. This approach not only stabilizes the financial position but also enhances the company’s creditworthiness and may lower future borrowing costs.

Increasing assets without incurring more debt would not address the underlying issue of an already high debt level. Similarly, increasing debt obligations would worsen the financial situation, and selling more equity to investors, while beneficial in some contexts, may not directly address the debt ratio if the raised funds are not utilized responsibly to reduce debt. Hence, decreasing reliance on debt financing is the most prudent and direct approach when facing a debt ratio above 50%.