hello everyone welcome to the channel of
Wallstreetmojo today we are going to discuss on the tutorial of debt ratio
the debt ratio as you can see in this yellow box debt ratio is one of the most
used solvency ratio by the investors so let’s directly jump on the debt ratio
formula it is one of the most used solvency ratio by the investor and it’s
pretty easy to calculate to let’s have a look at the formula of the debt ratio
and get into the nitty-gritty now the debt ratio formula is very simple
actually the debt ratio is equal to the total liabilities divided by the the
total asset it is as simple as that so basically we are comparing as you can
see the total liability in assets all you need to do is to look at the balance
sheet and find out where a firm has enough total assets to pay off its total
liability if you go in the explanation part of the debt ratio formula for
investors the financial statement are everything they look at all for statements and make their judgments one of the most important financial
statement is balance sheet by looking at the balance sheet the investors are able
to know what’s working for a come in what’s need to be improved so two of the
most important items on the balance sheets are assets and liabilities by
looking at the total assets and total liabilities investors are able to
understand with the form enough assets to pay off the liabilities and
that’s exactly what we call as debt ratio see by using this ratio we
calculate the proportionally total assets and total liabilities and by
looking at them we get to know the stands of the company at any stage so
what is the use of the debt ratio formula let’s look at that this ratio is
useful for two groups of people the first group is a top management of the
company who’s directly responsible for the
expansion or contraction of a company by using this ratio the top management sees
whether the company has enough resources to pay off its obligation the second
group is the investors who would like to see the position of the company before
they ever put in the money into the company and that’s why the investors
needs to know whether the form has enough assets to bear the expense of the
debt and other obligations so this ratio also measures the
financial leverage of the company and it also tells us the investors how leverage
the form is if the form has a higher level of liability is compared to the
assets then the form has more financial leverage and vice versa the case okay so
now let’s look at the example of the debt ratio formula let’s take a very
practical example to illustrate this ratio boom company has the following
details that we are going to discuss here the current asset non-current asset
details are I’m just trying to push the details over here the current
liabilities then we have the non current liabilities I’m just writing live over
here so this are all the details okay and let’s put the amount this is the
particulars and this are the amounts in dollars ok now the current assets is
close enough to 30 thousand then we have the non current assets as close enough
to 3 lakh dollars current liability let’s take as 40,000 and non current
liabilities as \$70,000 everything is in dollars now find out the debt ratio of
boom company this is we are discussing for boom company okay
in the above example we can see that we need to total the current and
non-current assets and also the current liabilities and non current liabilities
so the total assets are current assets + non current assets so the current
assets and the non current assets is 30000 + 3 lakh that is 3 lakh 30000 okay so I’m just quickly going to write over here as is equal to 30000 + 3 lakh so that’s the total of the total assets are current and
non-current now the total liabilities are current liabilities and non current
liabilities so let’s make the total 40,000 + 70,000 that’s 1 lakh 10000
okay so this are the two details okay now the debt ratio formula is the total
liability / the total asset so what is the total
liability over here as you can see one lakh ten okay so our final answer is
going to be is equal to the total liabilities divided by the the total
assets that is three lakh thirty so our debt ratio comes to 0.3333 okay the ratio of the boom company is close
enough to 0.33 so to know whether the disproportion between
the total liabilities and total asset is healthy or not we need to see the
similar companies under the same industry if the ratio of those companies
also in the similar range it means boom company is doing quite well in the
normal situation as lower as this ratio can be better as in terms of the
investment in solvency the debt ratio in terms of Excel with template you know we
can take a look at that and this is very simple I mean you need to provide the
two inputs of total liabilities in total asset and you can easily calculate the
ratio in the template as you can see in this particular template whatever we
have calculated in our excel sheet is over here you can see the current assets
non current the total assets three lakh thirty again the current liabilities
non-current liabilities forty plus seventy one hundred and one like ten
thousand so the total asset total liabilities and total asset which gives
us the debt ratio for the boom company now basically you can use this debt
ratio calculator to calculate your debt ratio okay so let’s put our total
liability as 2 lakh and a total asset as 1 lakh so that gives us our debt
ratio formula is two times so the debt is two times the total assets if we debt
our if we changed a debtor one over here and two over here we will get the debt
ratio formula is 0.5 X it is usually considered to as a greater it’s a good
number it’s a good way to calculate okay and if we put things over here as 5 and 2 or 5 and 1 over here you can see the debt ratio has increased to
5 see but 5 X is a very leveraged company like you know
companies like Jet Airways it has capital intensive company they have a debt close
enough to 12000 crores that is in terms of in INR the in the that’s the Indian currency INR will if you see that is a highly leveraged
company and that the debt is close enough to 12000 that means it’s that ratio is close enough to 4.5 X which is really high so such companies are really risking their cash flows their operations because
majority of their profits or funds are blocked in interest so the company
should not be highly leveraged or even if they are then they should set off
with some of the fixed deposits if they have any so that you know you can set
off the interest of the fixed deposit and the interest of the the interest of
the debt that you are going to pay so this is a debt calculator you can
calculate the debt ratio with the help of for this calculator I hope you have
got the concept regarding the debt ratio thank you