Financial Statement Analysis
- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Cash Flow from Operations Ratio
- Cash Reserve Ratio
- Operating Cycle Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Solvency Ratios
- Equity Ratio
- Capital Adequacy Ratio
- Liquidity Risk
- Altman Z Score
- Turnover Ratios
- Inventory Turnover Ratio
- Accounts Receivable Turnover
- Accounts Receivables Turnover Ratio
- Accounts Payable Turnover Ratio
- Days Inventory Outstanding
- Days in Inventory
- Days Sales Outstanding
- Average Collection Period
- Days Payable Outstanding
- Cash Conversion Cycle
- Cash Conversion Cycle (CCC) Formula
- Fixed Asset Turnover Ratio Formula
- Debtor Days Formula
- Working Capital Turnover Ratio
- Profitability Ratios
- Profitability Ratios Formula
- Common Size Income Statement
- Vertical Analysis of Income Statement
- Profit Margin
- Gross Profit Margin Formula
- Gross Profit Percentage
- Operating Profit Margin Formula
- EBIT Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Degree of Operating Leverage Formula (DOL)
- NOPAT Formula
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- Return on Sales
- ROIC Formula (Return on Invested Capital)
- Return on Investment Formula (ROI)
- ROIC vs ROCE
- ROE vs ROA
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula
- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Asset Ratio Formula
- Coverage Ratio
- Coverage Ratio Formula
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- DSCR Formula (Debt service coverage ratio)
- Financial Leverage Ratio
- Financial Leverage Formula
- Degree of Financial Leverage Formula
- Net Debt Formula
- Leverage Ratios
- Leverage Ratios Formula
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
- Solvency Ratio Formula
Debt Ratio Formula
It is one of the most used solvency ratios by investors. And it’s pretty easy to calculate too.
Let’s have a look at the formula of debt ratio –
All you need to do is to look at the balance sheet and find out whether a firm has enough total assets to pay off its total liabilities.
For an investor, the financial statements are everything. They look at all four financial statements and make their judgments. One of the most important financial statements is balance sheet. By looking at the balance sheet, the investors are able to know what’s working for a company and what needs to be improved.
Two of the most important items on the balance sheet are assets and liabilities. By looking at the total assets and the total liabilities, the investors are able to understand whether the firm has enough assets to pay off the liabilities. And that’s exactly what we call debt ratio.
By using this ratio, we calculate the proportion of the total assets and the total liabilities. And by looking at them, we get to know the stance of a company at any stage.
Use of Debt Ratio Formula
This formula of debt ratio is useful for two groups of people.
- The first group is the top management of the company who is directly responsible for the expansion or contraction of a company. By using this ratio, the top management sees whether the company has enough resources to pay off its obligations.
- The second group is the investors who would like to see the position of a company before they ever put in their money into the company. That’s why the investors need to know whether the firm has enough assets to bear the expenses of debts and other obligations.
This ratio also measures the financial leverage of the company. And it also tells the investors how leveraged the firm is. If the firm has a higher level of liabilities compared to assets, then the firm has more financial leverage and vice versa.
Let’s take a practical example to illustrate this formula of debt ratio.
Boom Company has the following details –
- Current Assets – $30,000
- Non-current Assets – $300,000
- Current Liabilities – $40,000
- Non-current Liabilities – $70,000
Find out the debt ratio of Boom Company.
In the above example, we can see that we need to total the current and non-current assets and also current liabilities and non-current liabilities.
- The total assets are = (Current Assets + Non-current Assets) = ($30,000 + $300,000) = $330,000.
- The total liabilities are = (Current Liabilities + Non-current Liabilities) = ($40,000 + $70,000) = $110,000.
- Debt ratio formula is = Total Liabilities / Total Assets = $110,000 / $330,000 = 1/3 = 0.33.
- Ratio of Boom Company is 0.33.
To know whether this proportion between total liabilities and total assets is healthy or not, we need to see the similar companies under same industry. If the ratio of those companies is also in the similar range, it means Boom Company is doing quite well.
In normal situations, as lower as this ratio can be; better it is in terms of investment and solvency.
Debt Ratio Calculator
You can use the following Debt Ratio Calculator
|Debt Ratio Formula =||
Debt Ratio in Excel (with excel template)
Let us now do the same example above in Excel.
This is very simple. You need to provide the two inputs of Total Liabilities and Total Assets.
You can easily calculate the ratio by using the formula of debt ratio in the template provided.
You can download this Debt ratio template here – Debt Ratio Excel Template
Debt Ratio Video
This has been a guide to Debt Ratio Formula, practical examples and debt ratio calculator along with excel templates. You may also have a look at these articles below to learn more about Financial Analysis –
- List of Non-Current Liabilities of Apple Inc
- Leverage Ratios Formula | Examples
- Examples of Non-Current Liabilities
- Ratio Formula in Excel
- Relevance and Uses of Solvency Ratio Formula
- Non-Current Assets in the Balance Sheet
- Current Assets
- Leverage Ratios
- Capitalization Ratio Formula
- DSCR Ratio
- Days Payable Outstanding
- Days Sales Outstanding