## Debt Ratio (Formula, Examples) | Calculation

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

Great video! All of your videos so far have been excellent.