The ratio of debt to equity is a measuring tool for calculating the solidity of a company. It represents a company's ability to sustain itself without regular capital increases, the effectiveness of its business strategies, its level of risk and stability, or a combination of all of these factors. Like many other measuring instruments, leverage can be expressed as a percentage value or a mathematical ratio.
Steps
Part 1 of 2: Retrieve the Company's Financial Information
Step 1. Access the company's public financial data
Publicly traded companies are required to disclose financial information. You can find many online sources where the income statements of these companies are published.
- If you have a brokerage account, it can be a good place to start; almost all online brokerage services allow access to the company's financial data through a simple search for the ISIN code.
- If you don't have a brokerage account, you can always have access to this information via the Yahoo! Finance. Just type the company ISIN code in the search bar and click "Search" to get a series of specific results for the company you are interested in, including financial ones.
Step 2. Determine the amount of the company's long-term debt in the form of bonds, loans, and lines of credit
You can find this data on the income statement of the company itself.
- It is easy to identify the value of the debts, because it is the number listed under the heading "Liabilities".
- The total sum of the debt coincides with the total of the liabilities; you don't have to worry about the individual entries that appear in this section.
Step 3. Determine the equity of the company
Just like for liabilities, this figure is also present in the income statement.
- The equity capital of a company is generally reported in the fund of the income statement and is indicated under the heading "Share capital".
- You can ignore the individual descriptions in the equity section, the only thing you need to know is the total value.
Part 2 of 2: Calculating the Company's Debt to Equity Ratio
Step 1. Express the value as a mathematical ratio, reducing the two numbers to their lowest common denominator
For example, a company with € 1 million in liabilities and € 2 million in equity should have a ratio of 1: 2. This means that there is 1 euro of credit investment for every 2 euro of shareholders' investment.
Step 2. Express the ratio as a percentage value by dividing the total debt by the entire equity and multiplying the quotient by 100
For example, a company that has € 1 million of debt and € 2 million of equity capital has a ratio of 50%. This means that there is 1 euro of credit investment for every 2 euro of shareholders' investment.
Step 3. Compare a company's debt and equity ratios with that of other companies you are considering
Generally speaking, a "healthy" society should have a ratio close to 1: 1 or 100%.
