Debt to equity calculator is a trouble-free plug-and-play calculator for evaluating the debt-equity ratio of any company. The calculator demands inputs like debentures, long-term liabilities, short-term liabilities, shareholder’s equity, reserves and surplus, retained earnings, fictitious assets, and accumulated losses. All these figures can be easily availed from the balance sheet of the company.
Debt Equity Ratio
The debt-equity ratio is a capital structure ratio meant to indicate about the long-term solvency of a firm. Investors and lenders mostly utilize it for evaluating the long-term stability of the business.
Formula for Calculating Debt Equity Ratio
We use the following detailed formula to calculate the debt to equity ratio:
| Debt | Debentures + Long-term Loans + Short-term Liabilities | |||
| Debt to Equity Ratio | = | —— | = | ————————————————————– |
| Equity | Shareholder’ Equity + Reserves and surplus + Retained Profits – Fictitious Assets – Accumulated Losses |
This formula can have many versions depending on the level of depth we explore. We have included a few things and have excluded a few others. For an in-depth understanding, we suggest reading our post on the Debt to Equity Ratio. Our formula is also influenced by this post.
About the Calculator / Features
This calculator effortlessly calculates the debt-equity ratio for any company. The user just needs to input the following inputs for the same.
- Debentures
- Long-term Liabilities
- Short-term Liabilities
- Shareholder’ Equity
- Reserves and Surplus
- Retained Profits
- Fictitious Assets
- Accumulated Losses
Calculator
Debt to Equity Ratio Calculator
How to Calculate using a Calculator
We just need to plug in the following figures in the calculator.
Debentures
The value of the debenture is available from the balance sheet.
Long-term Loans
All long-term liabilities, such as term loans from banks and financial institutions, etc. to be added for this figure.
Shareholder’ Equity
The value of equity share in the balance sheet.
Reserves and surplus
These are reserves and surpluses the entity must have accumulated till date from profits etc.
Retained Profits
Profits retained are shown in the balance sheet for growth investments by the company.
Fictitious Assets
Assets such as capitalized advertisement expenses are to be amortized over a period.
Accumulated Losses
If the company has incurred losses in the past, so we have to input accumulated losses from the balance sheet.
Example of Debt Equity Ratio
Assume an entity having the following figures
| Debentures | 1000000 |
| Long-term Liabilities | 1500000 |
| Short-term Liabilities | 500000 |
| Shareholder’ Equity | 1000000 |
| Reserves and surplus (R&S) | 2500000 |
| Retained Profits | included in R&S |
| Fictitious Assets | 50000 |
| Accumulated Losses | 0 |
Therefore, the debt equity ratio will be calculated as follows:
Debt Equity Ratio = (1000000+1500000+500000) / (1000000+2500000-50000) = 3000000/ 3450000 = 0.87.
Interpretation of Debt Equity Ratio
In the example above, we see that the debt to equity ratio is 0.87, which is less than 1. This ratio suggests that the company has less debt compared to equity. In other words, against $0.87 of debt, the company has $1 of equity.
Higher Debt Equity Ratio
Higher D/E Ratio commands better returns due to the leverage effect of debts. This effect will amplify profits only if the return on investment on the company’s projects is much better than the interest cost of lenders.
There are a few limitations also. With higher debts, the owners may face interference of lenders, lower chances of getting further debt, and the interest burden will always keep the profits under pressure.
A must-read before this post – Debt to Equity Ratio Interpretation.
Cautions
Before we conclude, we suggest readers not to arrive at any decision based on just one metric. However, other important metrics include interest service coverage ratio, debt service coverage ratios, and a host of other financial ratios.
