How to Calculate the Debt to Equity Ratio

There are many different ratios that determine the financial standing of a business. One key ratio is the debt to equity ratio. This is important because many banks and other lenders use it to determine credit worthiness. Running a business in today's market almost always requires a healthy credit line. To do that you need to have a solid debt to equity ratio. Of course, it would help to know how to compute the debt to equity ratio of your business, so here is how to do just that.

Difficulty: Moderate

Instructions

Things You'll Need:

• Your company's assets
• Your company's debts
• Calculator
• Basic math skills

1. Gather the supplies you will need to calculate your debt to equity ratio. You should use either a pad of paper and a pencil, or spreadsheet software on a computer. You will also need to have information about your company's debts and assets. This can be found in your company's financial reports.

2. Calculate your debt to equity ratio on a quarterly basis. The first financial information you will need to calculate is your company's entire debt. This includes all debts that the company owes. Typically these are divided into short term debts and long term debts on your financial statements. You will need to combine both of these categories to come up with the total debt of your company.

3. Calculate the total equity of your company. This involves the assets that your company owns. Once again, these are usually divided into short term assets and long term assets. Combine the two categories to determine your total equity for the company.

4. Divide your total debt of the company by the total equity of the company. This will give you a percentage. It tells what percentage your debt that you owe is compared to the total equity of your company.

5. Have your work confirmed. It is best to have a professional accountant review your calculations and confirm they are correct. Lenders will want to know that your debt to equity ratio is accurate. The lender will most likely ask for your financial paperwork and compute the ratio again. They will want to make sure you are presenting accurate information to them when seeking a loan.

Tips & Warnings

• As a business owner you should keep up to date on your debt to equity ratio. It can give you a good indication of the financial trends for your company.
• Always have your financials prepared or checked by an accountant.

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