Debt to Equity Ratio Calculator
Analyze how risky is an investment in a particular company with Calcopolis.
Debt to equity ratio is one of the most important factors that bankers and creditors look at while assessing the funding style of a particular company.
It's also a great metric to compare companies' financial flexibility and stability within the same industry.
One of the easiest ways to figure it out is using the Debt to Equity Ratio Calculator.
However, if you're looking for a deeper understanding of the metric, this guide will have you covered with everything you need to know. Let's dive right in!
What is the Debt to Equity Ratio?
Debt to equity ratio is a leverage ratio that is used to establish a quantitative relationship between the total amount of funds and* financial liabilities that a company owes and the total equity provided by the owners and the stockholders.
The metric is also used to evaluable and analyze the company's capital structure as well as the risk of loaning it, which is why it's also called the "risk ratio."
Debt to equity ratio shouldn't be confused with debt to asset ratio, which is a relatively similar metric that determines the proportion of the assets that are funded by creditors and debt rather than by equity.
How to Calculate Debt to Equity Ratio?
The easiest way to calculate debt to equity ratio is by using the Calcopolis Calculator. However, if you want to understand how this leverage ratio works, here's a quick look at the formula and how it works:
The Debt to Equity Ratio Formula
Debt to Equity Ratio = Total Liabilities / Stockholders Equity
Where:
- Total Liabilities are the sum of all short and long-term debts as well as any other fixed payments and obligations.
- Stockholders' Equity is the overall claim of the company's assets after subtracting total liabilities.
The result is usually represented in the form of a whole number or a fraction. Yet you can simply turn it into a percentage by multiplying it by 100. For example, 0.6 = 60% and 1.2 = 120%.
Example
Let's say that we have the balance sheets of two companies.
Company A recorded a total liability balance of $172,000,000 and stockholders equity of $134,000,000.
On the other hand, Company B recorded a total liability balance of $44,000,000 and a stockholders equity of $120,000,000.
In that case, the debt to equity ratio of Company A is $172,000,000 / $134,000,000 = 1.28 or 128%.
On the other hand, the debt to equity ratio of Company B is $44,000,000 / $120,000,000 = 0.36 or 36%.
In that example, we can conclude that company A adopts a very risky funding method that relies heavily on creditors rather than equity provided by shareholders.
On the other hand, relying on stockholders' equity rather than creditors gives company B more financial stability and better control over its operations, despite having lower overall assets than company A.
The Importance of This Metric
As previously established, the debt to equity ratio is one of the values that can help us analyze the capital-gathering style of different companies.
It's also a major factor that gauges the ability of a certain company to leverage and generate funds through loans, which is why investors and creditors often use it to assess the risk of lending to a certain company.
What Is Considered a Good Debt to Equity Ratio?
Higher or lower debt to equity ratio isn't necessarily better or worse, as it varies dramatically from one industry to another.
Also, A high debt to equity means that a company is aggressive with its borrowing policies. Yet, it also means that the company is capable of generating massive revenue that allows it to cover its financial obligations.
This boosts its score and encourages creditors and bankers to provide them with more capital.
How to Improve Debt to Equity Ratio?
Maintaining a high debt to equity ratio can be risky for some businesses. If you want to improve your debt to equity ratio by keeping it low, here are some essential tips that many business owners use:
Make sure that you pay down any loans as soon as possible, which reduces your interest rate on future financial obligations.
Improve or automate your inventory management system to speed up its turnover rate, which speeds up the cash flow and increases equity and assets value.
Try to improve your product promotions policy to increase sales revenue and expand your assets' value.
Authors
Created by Lucas Krysiak on 2023-02-15 18:03:55 | Last review by Mike Kozminsky on 2023-02-15 18:15:02