Debt ratios answer two questions creditors and investors always ask: how much of the business is financed with other people’s money, and can the business keep paying for it? This calculator takes a few balance-sheet and income-statement figures and returns nine leverage and coverage ratios, each with its formula and a plain-language reading.
How to use the debt ratios calculator
- Enter total assets and total liabilities from the balance sheet. Equity is calculated for you as assets minus liabilities.
- Optionally enter interest-bearing debt (loans, notes, bonds, finance leases) and the long-term portion of it. These drive debt-to-capital, long-term debt to capitalization and debt-to-EBITDA.
- Add annual EBIT, EBITDA, interest expense and debt service (principal plus interest due this year) for the coverage ratios.
- Read the debt ratio on the tape and the full table of ratios below it. Leave any optional field blank to skip the ratios that need it.
Debt ratio formulas
The first group (debt ratio, debt-to-equity, equity ratio, equity multiplier, debt-to-capital) describes the capital structure at a point in time. The second group (times interest earned, DSCR, debt-to-EBITDA) compares debt to earnings over a year, which is what actually pays creditors.
Worked example
A company reports $850,000 of assets and $510,000 of liabilities, so equity is $340,000.
Debt ratio = 510,000 ÷ 850,000 = 0.60 (60%)
Debt-to-equity = 510,000 ÷ 340,000 = 1.50, and the equity multiplier = 850,000 ÷ 340,000 = 2.50
With $380,000 of interest-bearing debt, debt-to-capital = 380,000 ÷ (380,000 + 340,000) = 52.8%
EBIT of $120,000 against $24,000 of interest gives times interest earned of 5.0×; EBITDA of $150,000 against $70,000 of debt service gives a DSCR of 2.14×.
The balance sheet looks moderately leveraged, but the coverage ratios are comfortable: earnings could drop substantially before interest or scheduled payments were at risk.
How to read the results
| Ratio | Lower suggests | Higher suggests |
|---|---|---|
| Debt ratio | More equity cushion for creditors | Heavier reliance on borrowing |
| Debt-to-equity | Conservative financing | Higher returns on equity, but more risk |
| Times interest earned | Interest is a burden on earnings | Plenty of room to absorb a bad year |
| DSCR | Cash flow barely covers payments | Capacity to borrow more |
| Debt-to-EBITDA | Debt could be repaid quickly | Years of earnings needed to repay |
Leverage is not automatically bad
Borrowing at 7% to earn 15% on assets raises the return to shareholders; that is the logic behind the equity multiplier in the DuPont formula. The danger is volatility. A cyclical manufacturer with a 70% debt ratio can be pushed into default by one weak year, while a regulated utility with steady cash flow carries the same ratio for decades.
Pitfalls
- Liabilities are not all debt. Accounts payable and deferred revenue are liabilities but carry no interest. Debt-to-capital and debt-to-EBITDA use interest-bearing debt only.
- Leases count. Since ASC 842, most operating leases appear on the balance sheet as liabilities, which raised reported leverage for retailers and airlines.
- Use one date. Mixing a year-end balance sheet with a mid-year income statement distorts coverage ratios.
For the short-term side of financial health, pair these results with the liquidity ratios calculator, and see the profitability ratios calculator for returns on assets and equity.
Ratios are analytical estimates based on the figures you enter. They are not credit ratings or investment advice; lenders apply their own definitions and covenants.
Frequently asked questions
What is a good debt ratio?
Many analysts treat a debt ratio below 0.4 (40%) as conservative and 0.4 to 0.6 as moderate. Above 0.6 the business relies heavily on creditors. Utilities and banks routinely run higher ratios than software or consulting firms, so compare within an industry.
What is the difference between the debt ratio and debt-to-equity?
Both use total liabilities, but the debt ratio divides by total assets while debt-to-equity divides by shareholders' equity. A debt ratio of 0.6 always corresponds to a debt-to-equity of 1.5, because equity is the remaining 0.4 of assets.
What does times interest earned tell a lender?
It shows how many times operating income (EBIT) covers the year's interest bill. A ratio of 5 means earnings could fall by 80% before the company could no longer pay interest out of operations. Below about 1.5 lenders get nervous.
What DSCR do banks require?
Commercial and SBA lenders commonly look for a debt service coverage ratio of at least 1.25, meaning cash flow is 25% larger than the year's principal and interest payments. Some real estate lenders accept 1.20; riskier loans may need 1.35 or more.
Why is debt-to-equity shown as n/a?
When liabilities equal or exceed assets, shareholders' equity is zero or negative and dividing by it produces a meaningless number. The debt ratio is still valid and will be 100% or higher in that case.