Debt Ratio Formula (Table of Contents)
Debt Ratio Formula
The formula for calculating Debt Ratio is as follows:
Where,
Total liabilities are the total debt and financial obligations payable by the company to organizations or individuals at any defined period of time. Total liabilities are stated on the balance sheet by the company.
Total Assets are a total amount of assets owned by an entity or an individual. Assets are items of monetary value, which are used over time to produce a benefit for the asset’s holder. In case of the owners of Assets are a company then these assets are stated in the balance sheet for the accounting records.
Examples of Debt Ratio Formula
Debt Ratio Formula Example #1
Let’s assume Company Anand Ltd have stated $15 million of debt and $20 million of assets on its balance sheet, we have to calculate Debt Ratio for Anand Ltd.
We can calculate Debt Ratio for Anand Ltd by using the Debt Ratio Formula:
- Debt Ratio = Total Liabilities / Total Assets
- Debt Ratio = $15,000,000 / $20,000,000
- Debt Ratio = 0.75 or 75%
This shows that for every $1 of assets that Company Anand Ltd has, they have $0.75 of debt. A ratio below 1.0 indicates that the company has less debt than assets.
Debt Ratio Formula Example #2
Jagriti Group of Companies have the following details as per its audited financials for the year ended 2017-18:
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- Current Assets – $45,000
- Non-current Assets – $200,000
- Current Liabilities – $50,000
- Non-current Liabilities – $60,000
We need to calculate the debt ratio of Jagriti Group of Companies.
As we can see in the above case the Total Assets and Total Liability is not provided, then we have to calculate Total Assets and Total Liability by the using the below formula:
- Total assets = (Current Assets + Non-current Assets)
- Total assets = ($45,000 + $200,000)
- Total assets = $245,000
- Total liabilities = Current Liabilities + Non-current Liabilities
- Total liabilities = ($50,000 + $60,000)
- Total liabilities = $110,000
We can calculate Debt Ratio for Jagriti Groupby using the Debt Ratio Formula:
- Debt Ratio = Total Liabilities / Total Assets
- Debt Ratio = $110,000 / $245,000
- Debt Ratio = 0.45 or 44%
A debt ratio of Jagriti Group of Companies is 0.45.
Debt Ratio Formula Example #3
The following figures have been obtained from the balance sheet of the Anand Group of Companies.
- Current Assets – $50,000
- Non-current Assets – $200,000
- Total Liabilities – $90,000
- Shareholder Equity- $160,000
We need to calculate the debt ratio of the Anand Group of Companies.
For calculating Debt Ratio, we need Total Liability and Total Assets. We need to calculate Total Assets by using the formula
- Total assets = Current Assets + Non-current Assets
- Total Assets = ($50,000 + $200,000)
- Total Assets = $250,000
We can calculate Debt Ratio for Anand Group of Companies Group by using the Debt Ratio Formula:
- Debt Ratio = Total Liabilities / Total Assets
- Debt Ratio= $90,000/ $250,000
- Debt Ratio = 0.36 or 36%
A debt ratio of Anand Group of Companies is 0.36.
Explanation
The debt ratio measures the weightage of leverage in the capital structure of a company, it is further can use for measuring the risk. If the debt ratio is high, then it shows the company is having a higher burden of repaying the principal and interest and it may impact the cash flow of the company and can create a glitch in financial performance or the situation of default may arise.
Assets and Liabilities are the two most important terms in the balance sheet of any company. By looking these two items the investors can interpret whether the company has enough assets to pay off its liabilities. And this what we call the debt ratio.
Debt ratio can be used as a measure of financial leverage. If a company have the Debt Ratio greater than 0.50 then the company is called a Leveraged Company. This shows the company has more debt funding in its capital structure. If the company have a lower debt ratio then the company is called a Conservative company.
Significance and Use of Debt Ratio Formula
Debt Ratio formula can be used majorly by the Top Management of a company or the investors:
Debt ratio formula can be used by the top management of the company to take the top-level decision of the company related to its capital structure and future funding. By using Debt ratio, the top management can take decision for raising the funds. Whether they want to raise funds from external sources like loan or debts or through equity. If the company have enough capitals to repay its obligations, then they can raise fund from external sources.
Debt Ratio formula can be used by the investors who want to invest in the company. This formula shows whether the firm has enough assets or capital to repay the debts and other obligations. As the company pays dividends to shareholders after paying all the debts and obligations of the company.
Debt ratio can be used as a measure of financial leverage. If a company have the Debt Ratio greater than 0.50 then the company is called a Leveraged Company. This shows the company has more debt funding in its capital structure. If the company have a lower debt ratio then the company is called a Conservative company.
If a company have Debt Ratio lower than 0.50 shows the company is stable and have a potential for longevity. A company can raise more funds from outside for the expansion. For every industry, the benchmark of Debt ratio may vary, but 0.50 Debt ratio of a company can be a reasonable ratio. This shows that the company has two times assets of its liabilities. Or we can say, the company’s liabilities are 50 % of its total assets.
If a company have Debt Ratio of 1, this means the company has total liabilities equals its total assets. Or we can say, if a company wants to pay off its liabilities then they would have to sell off all of its assets. If the company need to pay off the liabilities, they need to sell off its all assets and in that case, the company can no longer operate.
Debt Ratio Calculator
You can use the following Debt Ratio Calculator
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| Debt Ratio Formula | |
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Debt Ratio Formula in Excel (With Excel Template)
Here we will do the same example of the Debt Ratio formula in Excel. It is very easy and simple. You need to provide the two inputs i.e Total Liabilities and Total Assets
You can easily calculate the Debt Ratio using Formula in the template provided.
First, we need to calculate Total Liabilities
Then, we need to calculate Total Assets
Now, we can calculate Debt Ratio Using Formula
Recommended Articles
This has been a guide to a Debt Ratio formula. Here we discuss its uses along with practical examples. We also provide you with Debt Ratio Calculator with downloadable excel template. You may also look at the following articles to learn more –
