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If assets = liability + equity, and if (big if) more assets can be employed to efficiently increase income, then:
- increase liability - take on long term borrowings (non-current liabilities), which will have periodic interest expense as well as principal repayment at a fixed long-term date.
- increase equity - issue shares in the company, dilute control possibly, with the promise of retaining less profits through dividend payments (public drawings) periodically.
- the risk of increase liability is risk of failure to pay the principal and insolvency. Can liquidity ratios predict this ?
- the risk of issuing equity as shares is the loss of control of the company, with fewer retained profits due to dividend obligations, a drop in market value due to perceived dilution of share value, more mouths to feed and hence decreased EPS (earnings-per-share) for a given profit.
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