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

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
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
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)


How to calculate 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 a good ratio of debt-to-equity? ›

The optimal D/E ratio varies by industry, but it should not be above a level of 2.0. A D/E ratio of 2 indicates the company derives two-thirds of its capital financing from debt and one-third from shareholder equity.

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

When it comes to debt-to-equity, you're looking for a low number. This is because total liabilities represents the numerator of the ratio. The more debt you have, the higher your ratio will be. A ratio of roughly 2 or 2.5 is considered good, but anything higher than that is considered unfavorable.

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.

How to calculate debt ratio? ›

A company's debt ratio can be calculated by dividing total debt by total assets. A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt.

Is 0.2 a good debt ratio? ›

Low debt ratio: If the result is a small number (like 0.2 or 20%), it means the company doesn't owe a lot compared to what it owns. This is usually a good sign. A lower debt ratio indicates a healthier financial position.

Is a debt-to-equity ratio of 4 bad? ›

"A good debt-to-equity ratio really depends on the business in question, both in regards to its own financial strategy and the industry it operates within," says Shaun Heng, director of product strategy at MoonPay. "Ratios over 2.0 are generally considered risky, whereas a ratio of 1.0 is considered safe."

What is 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.

What is too high for debt to ratio? ›

Key takeaways

Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

What is the ideal debt ratio? ›

Do I need to worry about my debt ratio? If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.

Is a debt-to-equity ratio of 0.75 good? ›

Good debt-to-equity ratio for businesses

Many investors prefer a company's debt-to-equity ratio to stay below 2—that is, they believe it is important for a company's debts to be only double their equity at most. Some investors are more comfortable investing when a company's debt-to-equity ratio doesn't exceed 1 to 1.5.

Is 0.4 debt-to-equity ratio good? ›

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.

Is 0.25 a debt-to-equity ratio? ›

How is the D/E Ratio Calculated? If company ABC has a total outstanding debt of ₹10 Lakhs while its total shareholder's equity is ₹40 Lakhs, then the D/E ratio is 1/4 = 0.25.

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.

What is the formula for debt-to-equity ratio for banks? ›

Calculating the D/E Ratio

The D/E ratio is calculated as total liabilities divided by total shareholders' equity. For example, if, as per the balance sheet, the total debt of a business is worth $60 million and the total equity is worth $130 million, then the debt-to-equity is 0.46.

What is the formula for debt-to-equity ratio in Excel? ›

To calculate this ratio in Excel, locate the total debt and total shareholder equity on the company's balance sheet. Input both figures into two adjacent cells, say B2 and B3. In cell B4, input the formula "=B2/B3" to obtain the D/E ratio.

What is the formula for long term debt-to-equity ratio? ›

To calculate long-term debt to equity ratio, divide long-term debt by shareholders' equity. As we covered above, shareholders' equity is total assets minus total liabilities.

How to calculate quick ratio? ›

To find your company's quick ratio, first add together your cash, accounts receivable, and marketable securities to find your quick assets. Add together your accounts payable and short-term debt to find current liabilities. Then, divide your quick assets by current liabilities to find your quick ratio.

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