Debt Ratio Calculator for Business Financial Health
Calculate the debt ratio, debt to equity ratio and times interest earned ratio for one or two companies or reporting periods.
Debt Ratio Calculator
| Input | Company A / Period A | Company B / Period B (optional) |
|---|---|---|
| Ratio | A | B | Change |
|---|
Debt Ratio Reference Table
This reference table summarizes the formulas used to calculate each debt ratio in this calculator.
| Ratio | Formula |
|---|---|
| Debt Ratio | (Current Liabilities + Long Term Liabilities) / (Current Assets + Long Term Assets) |
| Debt to Equity Ratio | (Current Liabilities + Long Term Liabilities) / Equity |
| Times Interest Earned Ratio | (Net Income + Interest + Taxes) / Interest |
Debt Ratio Calculator Explained
The debt ratio calculator finds up to three measures of financial leverage for a business: the debt ratio, the debt to equity ratio and the times interest earned ratio. Enter values for current liabilities, long term liabilities, current assets, long term assets, equity, net income, interest and taxes, and the calculator returns whichever ratios can be computed from the inputs you provide.
You can analyze a single company over one reporting period by filling in column A only, or compare two companies or two periods by filling in both column A and column B. When both columns contain data for the same input, the calculator also shows the percent change between the two values.
How to Use the Debt Ratio Calculator
Begin by entering your balance sheet and income statement figures into column A. If you want to compare a second company or a second time period, enter those figures into column B. Choose the number of significant figures for rounding the ratios, then press Calculate or hit Enter on the last field.
The results table displays the debt ratio, debt to equity ratio and times interest earned ratio for column A and column B, along with the percent change between the two where applicable. Use the Clear button to reset all fields and run a new comparison.
Understanding the Debt Ratio
The debt ratio measures the portion of a company’s total assets that are financed through debt rather than equity. It is calculated by dividing total liabilities, which is current liabilities plus long term liabilities, by total assets, which is current assets plus long term assets. A debt ratio of 0.4 means 40 percent of the company’s assets are funded by borrowed money.
Understanding the Debt to Equity Ratio
The debt to equity ratio compares total liabilities to shareholder equity to show how a company finances its operations relative to the funds contributed by owners. A high debt to equity ratio indicates a company relies more on creditors and lenders, while a low ratio indicates more reliance on equity financing.
Understanding the Times Interest Earned Ratio
The times interest earned ratio, often abbreviated TIER, measures a company’s ability to make its interest payments from operating earnings. It is calculated by adding net income, interest and taxes together and dividing the sum by interest expense. A TIER of 5 means the company earns five times the amount needed to cover its interest payments.
Input Definitions for the Debt Ratio Calculator
Input definitions help clarify exactly what figures belong in each field of the debt ratio calculator.
- Current Liabilities: Short term obligations due within twelve months, including operating expenses, supplies and short term loans.
- Long Term Liabilities: Obligations that are not due for more than twelve months.
- Current Assets: Short term assets that can be converted to cash within twelve months.
- Long Term Assets: Fixed assets such as real estate, equipment, fixtures and vehicles, also called property, plant and equipment.
- Equity: Funds contributed by owners or shareholders plus retained earnings or losses.
- Net Income: Gross income minus taxes and interest.
- Interest: Interest payments made on loans, mortgages and outstanding bonds.
- Taxes: Total combined tax liabilities for the reporting period, including income, property and other applicable taxes.
Frequently Asked Questions About Debt Ratios
A debt ratio measures the portion of a company’s total assets that are financed through debt rather than equity. It is calculated by dividing total liabilities by total assets, and a higher ratio means a company relies more heavily on borrowed money.
The debt to equity ratio is calculated by dividing total liabilities, which is current liabilities plus long term liabilities, by total shareholder equity. This ratio shows how much debt a company uses for every dollar of equity.
A debt ratio below 0.5 is generally considered healthy, meaning less than half of a company’s assets are financed by debt. However, acceptable debt ratios vary by industry, since capital intensive sectors often carry higher ratios than service based businesses.
The times interest earned ratio measures a company’s ability to cover its interest payments using its earnings before interest and taxes. A higher ratio indicates the company can comfortably meet its interest obligations from operating income.
The times interest earned ratio is calculated by adding net income, interest expense and taxes together, then dividing that sum by the interest expense. This shows how many times over a company could pay its interest from earnings.
The debt ratio compares total liabilities to total assets, showing what portion of assets are debt financed. The debt to equity ratio compares total liabilities to shareholder equity, showing how much debt is used relative to ownership investment in the company.
Yes, this calculator allows you to enter figures for two separate companies or two reporting periods side by side, and it will calculate the percent change between the two sets of ratios.