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Introduction to the Debt-to-Equity Ratio Calculator
Understanding how your business balances debt and ownership funds or equity is a key part of financial planning. The Debt-to-Equity Ratio Calculator from Dexovise is a free tool that measures your leverage by comparing total liabilities to shareholders’ equity.
Enter your figures into this calculator to find out your business’s debt position quickly.
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What the Debt-to-Equity Ratio Means
The debt-to-equity ratio is a financial metric that shows how much of your company’s assets are financed from borrowed money compared to what the owners have put in. It’s found by dividing total liabilities by shareholders’ equity, telling you about your financial structure.
As a measure of leverage, this ratio is also known as risk ratio, gearing ratio or leverage ratio.
Total liabilities are all the amounts your business owes, both short-term and long-term. These include accounts payable to suppliers, short-term loans, accrued expenses like wages, taxes payable, and long-term debts such as bank loans or bonds.
Shareholders’ equity is the money from owners or investors, covering things like common stock, retained earnings from past profits, and any additional paid-in capital.
The debt-to-equity ratio is a critical measure because it shows if your business depends more on debt or equity, which affects its risk and stability.
How to calculate the Debt-to-Equity Ratio
There are two components in a debt-equity ratio- total liabilities and shareholder’s equity. The debt equity ratio can be arrived by taking your total liabilities and dividing them by your shareholders’ equity.
The formula is written as below:
Debt-to-Equity Ratio = Total Liabilities ÷ Shareholders’ Equity
The steps to calculate the debt-equity ratio include:
- List your total liabilities, including accounts payable, short-term loans, and long-term debts.
- Add them up to get the full amount of liabilities.
- Gather your shareholders’ equity, like common stock and retained earnings.
- Add those together for the total shareholders’ equity.
- Divide the total liabilities by the total shareholders’ equity to get the ratio.
For example, if your total liabilities are $60,000 and your shareholders’ equity is $40,000, you divide 60,000 by 40,000, which comes to 1.50.
The Debt-to-Equity Ratio Calculator makes it simple—just put in your liability and equity numbers, and it gives you the result right there, clear and exact.
What Your Debt-to-Equity Ratio Tells You
When the debt-to-equity ratio is high, it’s a sign that the business depends a lot on borrowing. This means that the total liabilities, like loans and accounts payable, are more than the shareholders’ equity, showing the business may not have enough of its own money.
In other words, it’s using debt financing because its own funds are short.
A low debt-to-equity ratio shows that the shareholders’ equity is more than the total liabilities. This tells us that the business has plenty of its own money and doesn’t need to borrow much to keep going.
It has more owned funds than borrowed funds, which is a good mark for the business.
So, a high debt-to-equity ratio means the business borrows more than it uses its own money, which can be risky, and a low ratio means it uses more of its own funds and less borrowing, which looks safer. By this, we can say a high ratio is often seen as a problem by those who study businesses.
However, what’s high or low can depend on the type of business. Companies in big industries, like manufacturing, often have a higher ratio because they need more money for things like machines.
Businesses in services or technology might have a lower ratio since they don’t need as much to grow. This means we should be careful when looking at these ratios across different kinds of companies.
Why the Debt-to-Equity Ratio Matters for Your Business
The debt-to-equity ratio holds importance because it shows how your business is funded through debt and equity. It’s a measure of how you balance borrowed money with what owners have invested.
The following points explain why this is significant for your business:
- It reveals how much you depend on total liabilities, like loans and accounts payable, to keep your operations going.
- Lenders use this ratio to see if your business can handle its debt payments, especially if the ratio is high, like 2.50.
- Investors look at it to know if your business uses more equity or debt, which affects its risk and growth potential.
This ratio is valuable because it helps you and others judge how your business manages its financial structure.
Debt-to-Equity Ratio in an Example
Looking at an example can show how the debt-to-equity ratio works in a real business setting. Consider a manufacturing company and its financial figures.
This will demonstrate how the ratio is calculated and what it means.
| Category | Amount ($) |
| Total Liabilities | |
| Accounts Payable | 30,000 |
| Short-Term Loans | 20,000 |
| Long-Term Debt | 50,000 |
| Total Liabilities | 100,000 |
| Shareholders’ Equity | |
| Common Stock | 40,000 |
| Retained Earnings | 20,000 |
| Total Shareholders’ Equity | 60,000 |
Debt-equity Ratio = 100,000 / 60,000 = 1.67
This means the company has $1.67 in total liabilities for every $1.00 in shareholders’ equity. For a manufacturing business, a ratio of 1.67 shows it uses a fair amount of debt to fund its equipment and operations, balanced by a good share of equity from owners.
This shows a moderate level of borrowing that supports growth while keeping some stability.
How the Debt-to-Equity Ratio Calculator Helps
The debt-to-equity ratio calculator from Dexovise is a tool that assists us in finding out how a business balances its funding. It works by using your total liabilities and shareholders’ equity to give a clear ratio.
The following points tell us how this calculator benefits your business:
- When you put in your total liabilities and shareholders’ equity, it calculates the debt-to-equity ratio without needing extra effort from you.
- It shows how much your business relies on borrowed funds compared to owned funds, giving a plain view of your leverage.
- The calculator helps us see if your total liabilities are too high against shareholders’ equity, so you know where your finances stand.
- It saves time by doing the division for you, making sure the number is right without manual work.
- By using it often, you can watch how your ratio changes, helping you understand your business’s debt position over time.
Ways to Adjust Your Debt-to-Equity Ratio
When you adjust your debt-to-equity ratio, your business can find a better balance between borrowed and owned funds. This ratio comes from comparing total liabilities to shareholders’ equity.
The following measures will help you adjust it:
- Pay off some of your total liabilities, like short-term loans or accounts payable, to bring down the amount you owe.
- Bring in more shareholders’ equity by getting new investors or keeping more profits, adding to your own funds.
- Borrow less when you need money, relying instead on what your business already has to lower the ratio.
- Sell assets that aren’t needed and use the cash to reduce total liabilities, cutting back on debt financing.
- Plan your spending so total liabilities don’t grow faster than shareholders’ equity, keeping the balance steady.
