Debt-to-equity ratio calculator (2024)

The debt-to-equity ratio measures your company’s total debt relative to the amount originally invested by the owners and the earnings that have been retained over time.

The debt-to-equity ratio of your business is one of the things the bank looks at to assess your situation before agreeing to lend you an additional amount.

Examples of debt-to-equity calculations?

Let’s say a company has a debt of $250,000 but $750,000 in equity. Its debt-to-equity ratio is therefore 0.3. “It’s a very low-debt company that is funded largely by shareholder assets,” says Pierre Lemieux, Director, Major Accounts, BDC.

On the other hand, a business could have $900,000 in debt and $100,000 in equity, so a ratio of 9. “In a case like that, the lenders almost completely financed the business,” says Lemieux.

Typically, the debt-to-equity ratio falls between these two extremes.

Example of a debt-to-equity ratio in a corporate balance sheet

LIABILITIES
Current liabilities
Accounts payable250,000
Current portion of long-term debt15,000
Total current liabilities265,000
Long-term liabilities
Long-term debt1,500,000
Amounts payable to related parties100,000
Total long-term liabilities1,600,000
TOTAL LIABILITIES1,865,000
SHAREHOLDERS’ EQUITY
Common shares100
Preferred shares250
Retained earnings
Opening balance of retained earnings540,000
Current period income125,000
Dividends paid(45,600)
Closing balance of retained earnings619,400
TOTAL SHAREHOLDERS’ EQUITY620,000
Debt-to-equity ratio3.01

How to interpret a debt-to-equity ratio?

The goal for a business is not necessarily to have the lowest possible ratio. “A very low debt-to-equity ratio can be a sign that the company is very mature and has accumulated a lot of money over the years,” says Lemieux.

But it can also be a sign of resource allocation that is not optimal. “There is no doubt that the level of risk that shareholders can support must be respected, but it is possible that a very low ratio is a sign of overly prudent management that does not seize growth opportunities,” says Lemieux.

He also notes that it is not uncommon for minority shareholders of publicly traded companies to criticize the board of directors because their overly prudent management gives them too low a return.

“For example, minority shareholders may be dissatisfied with a 5% capital gain because they are aiming for 15%,” says Lemieux. “To get to 15%, you can’t sit on a lot of money and run the business super-prudently. The company has to invest in productive resources using debt to leverage.”

What is a good debt-to-equity ratio?

Although it varies from industry to industry, a debt-to-equity ratio of around 2 or 2.5 is generally considered good. This ratio tells us that for every dollar invested in the company, about 66 cents come from debt, while the other 33 cents come from the company’s equity.

“This is a very low-debt business with a sound financial structure,” says Lemieux.

What is a bad debt-to-equity ratio?

When the ratio is more around 5, 6 or 7, that’s a much higher level of debt, and the bank will pay attention to that.

“It doesn’t mean the company has a problem, but you have to look at why their debt load is so high,” says Lemieux. “If it has just invested in a major project, it is perfectly normal for its ratio to rise. Then the company will make a profit on its investment and its ratio will tend to fall to more normal.”

It’s also important to note that some industries naturally require a higher debt-to-equity ratio than others. “For example, a transport company has to borrow a lot to buy its fleet of trucks, while a service company will practically only have to buy computers,” explains Lemieux.

Where do you find the average debt-to-equity ratio in your industry?

To do benchmarking, you can consult various sources to obtain the average for your business sector.

BDC provides access to benchmarks by industry and firm size to its clients. This data is also available from some private companies. University research centres can also be a good source of information.

What is the long-term debt-to-equity ratio?

It’s the same calculation, except that it only includes long-term debt. So, for example, you subtract the balance on the operating line of credit and the amounts owed to suppliers from the liabilities. “By keeping only the long-term debt, it is more revealing of the company’s true debt level,” says Lemieux.

While for some businesses, eliminating short-term debt does not make a huge difference to the end result, for others, it is major.

“Some types of businesses, such as distributors, need to have a lot of inventory, which adds to their debt,” says Lemieux. “However, those amounts are paid off as the company makes its sales. It has nothing to do with loans from the bank.”

Some banks use this ratio taking long-term debt, while others keep total debt.

Is the debt-to-equity ratio widely used by banks?

According to Pierre Lemieux, the debt-to-equity ratio is interesting because it can be easily tracked from month to month. However, he noted that its use is decreasing.

“It’s a balance sheet-only ratio,” he says. “It does not look at the funds generated by the company, that is, the cash flow. For example, a company that has $1 million in after-tax profits and another that benefits from its good years in the past and that now has a net loss of $1 million annually can have the same debt ratio. However, the former would be in a much better position to repay its debt than the latter.”

The interest-bearing debt (IBD) to earnings before interest, depreciation and amortization (EBITDA) ratio

Lemieux explains that the IBD to EBITDA ratio is increasingly used because it compensates for weaknesses in the debt-to-equity ratio by taking into account a company’s cash flow and excluding its non-interest-bearing debt (such as accounts payable and amounts owed to the government).

“This ratio looks at the company’s balance sheet, but also its cash flow. It thus enables the bank to better assess the company’s ability to repay its debt.”

However, he notes that it is more difficult to track the IBD/EBITDA ratio on a monthly basis.

“Normally, it is calculated at the end of the fiscal year,” says Lemieux. “It is also calculated on an interim basis, but a 12-month rolling window must then be used. To calculate it, say in April, you have to look at the company’s numbers for the previous 12 months, starting in May of the previous year. Not all businesses are equipped to pull out this data.”

So while the debt-to-equity ratio is not perfect, the others are not perfect either. That is why it is advantageous for businesses and financial institutions to pay attention to the different ratios.

Download our free guide Monitoring Your Business Performance for more information on key ratios for managing your business.

Our other ratio calculators

Debt-to-equity ratio calculator (2024)

FAQs

How do you calculate the debt-to-equity ratio? ›

The debt-to-equity (D/E) ratio is used to evaluate a company's financial leverage and is calculated by dividing a company's total liabilities by its shareholder equity.

Is 2.5 a good debt-to-equity ratio? ›

Although it varies from industry to industry, a debt-to-equity ratio of around 2 or 2.5 is generally considered good. This ratio tells us that for every dollar invested in the company, about 66 cents come from debt, while the other 33 cents come from the company's equity.

What is good debt-to-equity ratio? ›

Generally, a good debt to equity ratio is around 1 to 1.5. However, the ideal debt to equity ratio will vary depending on the industry, as some industries use more debt financing than others.

Is a debt-to-equity ratio of 1.4 good? ›

The D/E ratio can vary as per the industry and various other factors that influence the company's performance. However, it is generally agreed that a debt-to-equity ratio between 1.5 to 2.5 indicates a financially stable company with a low risk profile.

What debt equity ratio means? ›

The debt-to-equity ratio shows how much of a company is owned by creditors (people it has borrowed money from) compared with how much shareholder equity is held by the company.

Is 0.2 debt-to-equity good? ›

Generally, a good debt-to-equity ratio is anything lower than 1.0. A ratio of 2.0 or higher is usually considered risky. If a debt-to-equity ratio is negative, it means that the company has more liabilities than assets—this company would be considered extremely risky.

Is 0.5 a good debt-to-equity ratio? ›

Generally, a lower ratio is better, as it implies that the company is in less debt and is less risky for lenders and investors. A debt-to-equity ratio of 0.5 or below is considered good.

Is 0.2 a good debt-to-equity ratio? ›

In general, many investors look for a company to have a debt ratio between 0.3 and 0.6. From a pure risk perspective, debt ratios of 0.4 or lower are considered better, while a debt ratio of 0.6 or higher makes it more difficult to borrow money.

What's a bad debt to equity ratio? ›

The maximum acceptable debt-to-equity ratio for more companies is between 1.5-2 or less. Large companies having a value higher than 2 of the debt-to-equity ratio is acceptable. 3. A debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations.

How much debt does Coca Cola have? ›

Coca-Cola's total debt for fiscal years ending December 2019 to 2023 averaged 43.933 billion. Coca-Cola's operated at median total debt of 44.246 billion from fiscal years ending December 2019 to 2023. Looking back at the last 5 years, Coca-Cola's total debt peaked in December 2023 at 44.544 billion.

What is a bad debt ratio? ›

The bad debt to sales ratio represents the fraction of uncollectible accounts receivables in a year compared to total sales. For example, if a company's revenue is $100,000 and it's unable to collect $3,000, the bad debt to sales ratio is (3,000/100,000=0.03).

Is 1.5 a good debt-to-equity ratio? ›

A good debt to equity ratio is around 1 to 1.5. However, the ideal debt to equity ratio will vary depending on the industry because some industries use more debt financing than others. Capital-intensive industries like the financial and manufacturing industries often have higher ratios that can be greater than 2.

Is 0.9 a good debt-to-equity ratio? ›

Debt-to-equity ratio values tend to land between 0.1 (almost no debt relative to equity) and 0.9 (very high levels of debt relative to equity). Most companies aim for a ratio between these two extremes, both for reasons of economic sustainability and to attract investors or lenders.

Is 1.7 a good debt-to-equity ratio? ›

The debt-to-equity ratio is calculated by dividing a corporation's total liabilities by its shareholder equity. The optimal D/E ratio varies by industry, but it should not be above a level of 2.0.

What does a debt-to-equity ratio of 2.5 mean? ›

The ratio is the number of times debt is to equity. Therefore, if a financial corporation's ratio is 2.5 it means that the debt outstanding is 2.5 times larger than their equity. Higher debt can result in volatile earnings due to additional interest expense as well as increased vulnerability to business downturns.

Is 2% a good debt-to-income ratio? ›

Your debt-to-income (DTI) ratio is how much money you earn versus what you spend. It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”

What does a 2.0 debt-to-equity ratio mean? ›

A D/E ratio of 2 indicates that the company derives two-thirds of its capital financing from debt and one-third from shareholder equity, so it borrows twice as much funding as it owns (2 debt units for every 1 equity unit).

Is 3 a good debt-to-equity ratio? ›

The maximum acceptable debt-to-equity ratio for more companies is between 1.5-2 or less. Large companies having a value higher than 2 of the debt-to-equity ratio is acceptable. 3. A debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations.

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