Debt to Equity Ratio Calculator
Debt to Equity Ratio Calculator
How much of a business is funded by what it owes rather than by its owners: the debt-to-equity ratio, the debt ratio and equity multiplier, and whether operating profit covers the interest.
Debt-to-equity ratio
Total liabilities $40,00,000, shareholders’ equity $60,00,000, EBIT $16,00,000, interest $4,00,000
Debt-to-equity, debt ratio and interest cover
- debt
- total liabilities (the OpenStax textbook definition) or interest-bearing borrowings only
- total assets
- total liabilities + equity, so the debt ratio and equity multiplier are shown only on the total-liabilities basis
- debt to capital
- borrowings ÷ (borrowings + equity), the borrowings-only counterpart of the debt ratio
Worked example
Total liabilities $40,00,000, shareholders' equity $60,00,000, EBIT $16,00,000, interest $4,00,000
D/E = 40,00,000 ÷ 60,00,000 = 0.67
Total assets = 40,00,000 + 60,00,000 = $1,00,00,000; debt ratio = 40.00%; equity multiplier = 1.67
Interest cover = 16,00,000 ÷ 4,00,000 = 4.00 times
Counting only the $25,00,000 of loans and debentures instead: D/E = 0.42
One balance sheet, two debt-to-equity ratios
| What counts as debt | Debt | D/E | Share of funding from debt |
|---|---|---|---|
| Total liabilities | $40,00,000 | 0.67 | 40.00% (debt ratio) |
| Borrowings only | $25,00,000 | 0.42 | 29.41% (debt to capital) |
Which debt? Why sources disagree, and how to read the ratio
The debt-to-equity ratio compares what a business owes with what its owners have put in and left in. The trouble is the word “debt”. The OpenStax finance textbook uses total liabilities — loans, but also money owed to suppliers, taxes due and provisions. Banks, credit analysts and many annual reports count only interest-bearing borrowings: term loans, working-capital loans, debentures and lease liabilities. The same balance sheet gives 0.67 on the first definition and 0.42 on the second, as the table shows, so a ratio quoted without its definition cannot be compared with anything.
On the total-liabilities basis the rest follows from the balance sheet identity, assets = liabilities + equity. The debt ratio is liabilities over total assets, 40% in the example, and the equity multiplier is assets over equity, 1.67; the same multiplier is the leverage term in the DuPont breakdown of return on equity. A debt ratio above 100% means liabilities exceed assets and equity is negative. On the borrowings-only basis total assets are not known, so the page shows debt to capital instead.
Interest cover — EBIT over interest expense, or times interest earned — shows whether the business can service the debt it has: 4 times in the example. Below 1, operating profit does not pay the interest bill. The textbook sets no threshold for either ratio, and neither does this page. Businesses with steady cash flows and long-lived assets, such as utilities and property, usually carry far more debt than software or services firms; banks and NBFCs are funded mostly by liabilities by design and are judged by capital adequacy, not by this ratio. Compare with the same industry and with the trend, and read the loan terms: lenders’ covenants set the limits that actually bind.
Use figures from the same balance sheet date. For the short-term picture, the current ratio calculator compares current assets with current liabilities; for a household’s borrowing against income, use the debt-to-income calculator. This is arithmetic on the figures you enter, not financial advice.
Frequently asked questions
How do you calculate the debt-to-equity ratio?
Debt divided by shareholders’ equity. 40,00,000 ÷ 60,00,000 = 0.67 in the example, on total liabilities.
Should I use total debt or total liabilities?
Either, as long as you say which. The OpenStax textbook uses total liabilities; lenders and analysts often use interest-bearing borrowings only. Compare like with like.
What is a good debt-to-equity ratio?
There is no universal figure. It depends heavily on the industry and on how steady the cash flows are; compare with similar businesses and read any loan covenants.
What does negative equity mean for the ratio?
If liabilities exceed assets, equity is negative and the ratio has no meaningful value. The page asks for equity above zero.
What is interest cover?
Operating profit (EBIT) divided by interest expense: how many times profit covers the interest bill. Below 1 means it does not.
Related calculators
References
- Dahlquist J, Knight R. Principles of Finance. OpenStax, Rice University, 2022. Section 6.2 (operating efficiency: inventory turnover = cost of goods sold ÷ average inventory; receivables turnover = credit sales ÷ average receivables), section 6.4 (solvency: debt-to-assets = total liabilities ÷ total assets; debt-to-equity = total liabilities ÷ total stockholders’ equity; times interest earned = EBIT ÷ interest expense) and section 6.6 (return on assets and on equity on average balances; the DuPont method: profit margin × total asset turnover × equity multiplier).
- Atrill P, McLaney E. Accounting and Finance for Non-Specialists. Pearson. Return on capital employed = operating profit ÷ (share capital + reserves + non-current liabilities) × 100; return on ordinary shareholders’ funds; gearing. Definitions of capital employed vary between texts and companies.