Calculate Debt Income Ratio

Posted on November 19, 2011 by Admin
Calculate Debt Income Ratio

Calculate Debt Income Ratio

The debt to equity ratio is useful when determining whether to buy a long term position in either value or high growth stocks. What does this calculated quotient reveal?

Debt to Equity Ratio Calculation

To calculate this number, simply divide all liabilities by the shareholder equity (liabilities/equity=d/e). Sometimes it is expressed as a percentage.

  • 0 Debt / Any Equity Value = 0
  • $1,000,000 Debt / $1,000,000 Equity = 1 or 100%
  • $1,000,000 Debt / $2,000,000 Equity = 0.5 or 50%
  • $2,000,000 Debt / $1,000,000 Equity = 2 or 200%

What This Ratio Means

This calculation quickly shows how much financial leverage the company has. You will instantly know if debt has been financed with every dollar of equity (a ratio of 1), if the company has very little debt compared to its assets (a low ratio such as 0.2), or if the company owes more than it is worth (any ratio over 1).