Common Financial Ratios: Key Metrics for Stock Analysis

A debt ratio of less than 0.5 indicates that a company has more assets than debt, while a debt ratio of greater than 0.5 indicates that a company has more debt than assets. For this reason, it’s best to do some preliminary research on the industry before making a decision based on the debt ratio. If the debt ratio is used a lender were to request immediate repayment of their loans, then the business could be in danger of insolvency or a high risk of bankruptcy. When using the debt ratio to analyze a company’s financial position, it’s important to know how much debt the industry historically carries. Some sectors like technology have very low debt ratios, so seeing ratios above 26% in this industry might raise alarms.

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• You could request a limit increase from your current credit card issuer or open a new credit account to impact your debt-to-credit ratio calculator.
• A debt ratio of less than 0.5 indicates that a company has more assets than debt, while a debt ratio of greater than 0.5 indicates that a company has more debt than assets.
• Once you understand how to figure credit to debt ratio, you’ll likely want to take practical steps to improve it for greater financial flexibility and purchasing power in the future.
• Calculate the total value of everything the company owns, such as cash, inventory, property, equipment, and receivables.
• Another shortcoming is that the debt ratio is misleading when comparing companies of different sizes.
• A high debt-to-EBITDA ratio signals high financial risk since it means the company is carrying significant debt relative to its earnings.

Moderately leveraged firms often strike the right balance between risk and returns. The debt ratio should be used in conjunction with other financial metrics to get a complete picture of a company’s financial health. It is important to consider a company’s industry, size, and growth prospects when interpreting its debt ratio. Additionally, the debt ratio does not take into account the quality of a company’s assets or its ability to generate cash flow. The debt-to-equity ratio is a financial ratio used to evaluate a company’s leverage and financial health. It is calculated by dividing a company’s total liabilities by its shareholder equity.

• Tools like Accounting software simplifies tracking the company finances, making it easier to calculate the debt ratio.
• The purpose of calculating the debt ratio of a company is to give investors an idea of the company’s financial situation.
• For example, if a company’s debt ratio keeps rising over time, it implies that it needs to take on debt to buy assets to fuel growth.
• The industry with the worst average Zacks Rank (265 out of 265) would place in the bottom 1%.
• Lenders typically look for debt-to-credit ratios of 30% or less, which indicates that a borrower is less likely to be a financial risk.
• One of the most commonly used ratios alongside the debt ratio is the debt-to-equity ratio.

Total Assets

Add up all a company’s debts and obligations, including loans, accounts payable, and any other liabilities. Calculate the total value of everything the company owns, such as cash, inventory, property, equipment, and receivables. This Ratio shows how many years it would take for bookkeeping and payroll services a company to pay off its debt if it devoted all EBITDA to debt repayment. A high debt-to-EBITDA ratio signals high financial risk since it means the company is carrying significant debt relative to its earnings. A rising ratio over time is a negative sign, while a declining ratio suggests improving financial health.

Investor Services

• Investors should supplement the debt ratio with other solvency ratios to get a more complete picture of a company’s leverage.
• Continue reading to learn why the debt ratio is important, how to use it, how to calculate it, and more.
• However, the utilities and consumer staples tend to have much less volatile earnings and more reliable cash flows from one year to the next.
• A high risk level, with a high debt ratio, means that the business has taken on a large amount of risk.
• If a company has a negative D/E ratio, this means that it has negative shareholder equity.
• The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security.

In other words, the debt ratio shows how much a company is leveraging or how much of its financing comes from loans and debts. Once we know this ratio, we can use it to determine how likely a company is to become unable to pay off its debts. Tools like Accounting software simplifies tracking the company finances, making it easier to calculate the debt ratio. The debt ratio ranges from zero (no debt) to one (all liabilities, no equity). It cannot go below zero due to the factor that total liabilities and total equity cannot be negative. Even if a company has negative equity, meaning liabilities exceed assets, the debt ratio would be greater than one.

Many investors look for a company to have a debt ratio between 0.3 (30%) and 0.6 (60%). During times of high interest rates, good debt ratios tend to be lower than during low-rate periods. All interest-bearing assets have interest rate risk, whether they are business loans or bonds. The same principal amount is more expensive to pay off at a 10% interest rate than it is at 5%.

• A rising ratio over time is a negative sign, while a declining ratio suggests improving financial health.
• Debt ratios vary greatly among industries, so when comparing them from one company to the other, it’s important to do so within the same industry.
• Because different industries have different capital needs and growth rates, a D/E ratio value that’s common in one industry might be a red flag in another.
• For example, airline companies may need to borrow more money, because operating an airline requires more capital than a software company, which needs only office space and computers.
• The cost of debt and a company’s ability to service it can vary with market conditions.
• For public companies, a low debt ratio generally means a debt-to-equity ratio below 0.5 and a debt-to-income ratio under 1.0.

Navigating Financial Ratios with Intrinio

Spike signals aggressive growth plays while falling debt levels typically indicate tighter financing or reduced risk. The Debt-to-Equity (D/E) ratio assesses a company’s financial leverage by comparing its total liabilities to shareholder equity. This ratio provides insights into how bookkeeping much of the company is financed through debt versus equity. Investors should dig deeper into the footnotes and management discussions to understand the impact of complex capital structures.