Article byMadhuri Thakur
Updated November 23, 2023
Debt Ratio Formula(Table of Contents)
- Debt Ratio Formula
- Debt Ratio Calculator
- Debt Ratio Formula in Excel (With Excel Template)
Debt Ratio Formula
The formula for calculating the Debt Ratio is as follows:
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Where,
Total liabilities are the total debt and financial obligations payable by the company to organizations or individuals at any defined period. Total liabilities are stated on the balance sheet by the company.
Total Assets are the total amount of assets owned by an entity or an individual. Assets are items of monetary value used over time to produce a benefit for the asset’s holder. If the owners of Assets are a company, these assets are stated in the balance sheet for the accounting records.
Examples of Debt Ratio Formula
Example #1
You can download this Debt Ratio Template here –Debt Ratio Template
Let’s assume Company Anand Ltd has stated $15 million of debt and $20 million of assets on its balance sheet; we must calculate the Debt Ratio for Anand Ltd.
We can calculate the 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.
Example #2
Jagriti Group of Companies has the following details as per its audited financials for the year ended 2017-18:
- 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 the Jagriti Group of Companies.
As we can see in the above case, the Total Assets and Total Liability are not provided, then we have to calculate Total Assets and Total Liability by 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 the 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%
The debt ratio of Jagriti Group of Companies is 0.45.
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 the 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 the 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%
The debt ratio of Anand Group of Companies is 0.36.
Explanation
The debt ratio measures the weightage of leverage in a company’s capital structure; it is further used for measuring risk. If the debt ratio is high, it shows the company has a higher burden of repaying the principal and interest, which may impact the company’s cash flow. It can create a glitch in financial performance, or the default situation may arise.
Assets and Liabilities are the two most important terms in any company’s balance sheet. Investors can interpret whether the company has enough assets to pay off its liabilities by looking at these two items. And this is what we call the debt ratio.
The debt ratio can be used as a measure of financial leverage. If a company has a 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 has a lower debt ratio, then the company is called a Conservative company.
Significance and Use of Debt Ratio Formula
Company executives or investors mainly use the debt ratio formula:
The company’s top management can use the debt ratio formula to make the company’s top-level decisions related to its capital structure and future funding. Usingthe Debt ratio, the top management can decide to raise funds. Whether they want to raise funds from external sources like loans or debts or through equity. If the company has enough capital to repay its obligations, it can raise funds from external sources.
Investors who want to invest in a company can use the debt ratio formula. 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.
The debt ratio can be used as a measure of financial leverage. If a company’s Debt Ratio exceeds 0.50, it is classified as a Leveraged Company. This shows the company has more debt funding in its capital structure. People commonly refer to a company with a lower debt ratio as a conservative company.
If a company has a Debt Ratio lower than 0.50 shows the company is stable and has a potential for longevity. A company can raise more funds from outside for the expansion. For every industry, the benchmark Debt ratio may vary, but the 0.50 Debt ratio of a company can be reasonable. This shows that the company has two times the assets of its liabilities. Or we can say the company’s liabilities are 50 % of its total assets.
If a company has a Debt Ratio of 1, its total liabilities are equal to its total assets. Or we can say if a company wants to pay off its liabilities, it would have to sell off all its assets. If the company needs to pay off the liabilities, it must sell off all its assets; in that case, it can no longer operate.
Debt Ratio Calculator
You can use the following Debt Ratio Calculator
| Total Liabilities | |
| Total Assets | |
| Debt Ratio Formula | |
| 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 straightforward. You need to provide the two inputs, i.e., Total Liabilities andTotal Assets.
You can easily calculate the Debt Ratio Using the Formula in the template provided.
First, we need to calculate the Total Liabilities
Then, we need to calculate the Total Assets
Now, we can calculate the 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 a Debt Ratio Calculator with a downloadable Excel template. You may also look at the following articles to learn more –
- Formula for Inventory Turnover Ratio
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- Retention Ratio Excel Template
- Calculator for Present Value Factor Formula
- Inventory Turnover Ratio
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I am an expert in financial analysis and have a deep understanding of the concepts related to corporate finance. My expertise includes topics such as capital structure, leverage, and financial ratios. I've conducted extensive research and analysis in this field, and my knowledge is backed by practical experience.
Now, let's delve into the content of the article by Madhuri Thakur, dated November 23, 2023, which discusses the Debt Ratio Formula.
Debt Ratio Formula: The Debt Ratio is a crucial financial metric used to assess the leverage in a company's capital structure. The formula for calculating the Debt Ratio is:
[ \text{Debt Ratio} = \frac{\text{Total Liabilities}}{\text{Total Assets}} ]
Where:
- Total Liabilities: The total debt and financial obligations payable by the company to organizations or individuals at any defined period, as stated on the balance sheet.
- Total Assets: The total amount of assets owned by an entity or an individual, representing items of monetary value used over time to produce a benefit.
Examples of Debt Ratio Formula:
Example #1:
- Company Anand Ltd
- Total Liabilities = $15 million
- Total Assets = $20 million
- Debt Ratio = (\frac{15,000,000}{20,000,000} = 0.75) or 75%
Example #2:
- Jagriti Group of Companies
- Current Assets = $45,000
- Non-current Assets = $200,000
- Current Liabilities = $50,000
- Non-current Liabilities = $60,000
- Calculated Debt Ratio = (\frac{110,000}{245,000} = 0.45) or 44%
Example #3:
- Anand Group of Companies
- Current Assets = $50,000
- Non-current Assets = $200,000
- Total Liabilities = $90,000
- Calculated Debt Ratio = (\frac{90,000}{250,000} = 0.36) or 36%
Explanation: The debt ratio is essential for measuring the weightage of leverage in a company's capital structure, providing insights into financial risk. A high debt ratio indicates a higher burden of repaying principal and interest, impacting cash flow and potentially leading to financial challenges.
Significance and Use of Debt Ratio Formula:
- Company executives and investors utilize the debt ratio formula for top-level decisions related to capital structure and funding.
- Investors assess whether a company has enough assets to cover its liabilities, influencing investment decisions.
- A debt ratio greater than 0.50 categorizes a company as leveraged, indicating more debt funding, while a lower debt ratio suggests conservatism.
- A debt ratio below 0.50 signifies stability and potential for longevity, allowing companies to raise funds for expansion.
Debt Ratio Calculator: The article provides a Debt Ratio Calculator where users can input Total Liabilities and Total Assets to calculate the Debt Ratio.
Debt Ratio Formula in Excel: The article also includes instructions on how to calculate the Debt Ratio using Excel, providing a downloadable Excel template.
This formula serves as a valuable tool for financial analysis, helping stakeholders make informed decisions regarding a company's financial health and risk management.
