How to Calculate Debt Ratio Using an Equity Multiplier

by Lisa S. Kramer, Demand Media
    An equity multiplier and a debt ratio provide insight into a company's debt management.

    An equity multiplier and a debt ratio provide insight into a company's debt management.

    An equity multiplier and a debt ratio are financial leverage ratios that show how a company uses debt to finance its assets. To find a company's equity multiplier, divide its total assets by its total stockholders' equity. To find a company's debt ratio, divide its total liabilities by its total assets. For both of these metrics, a higher number means the company is more reliant on debt to finance its assets, which indicates a higher level of risk for the company and its stockholders. If you know both a company's total assets and its equity multiplier, you can calculate its debt ratio.

    Items you will need

    • Calculator
    • Company's balance sheet

    Step 1

    Obtain the company's most recent balance sheet from either its annual (Form 10-K) or quarterly (Form 10-Q) filings, using whichever was filed most recently. On the SEC’s website, you can use the Next Generation EDGAR System to search for a publicly traded company's 10-K or 10-Q filings. Also, some companies post their basic financial statements including their balance sheets on their company website under their website’s “About Us” or “Investor Relations” sections.

    Step 2

    Find the company's total assets on its balance sheet. For example, Company X has $2 million in total assets.

    Step 3

    Divide the company's total assets by its known equity multiplier to find the company's total stockholders' equity. For example, if Company X has an equity multiplier of 2, divide $2 million (Company X's total assets) by 2 to get a total stockholders' equity of $1 million. This equity multiplier indicates that for every dollar in stockholder's equity, Company X has $2 in assets.

    Step 4

    Subtract the company's total stockholders' equity from its total assets to find its total liabilities. For example, subtract $1 million (Company X's total stockholders' equity) from $2 million (Company X's total assets) to get $1 million in total liabilities for Company X.

    Step 5

    Divide the company's total liabilities by its total assets to get its debt ratio. For example, divide $1 million (Company X's total liabilities) by $2 million (Company X's total assets) to get a debt ratio of .5 (or 50 percent). This debt ratio indicates that Company X finances half of all its assets with debt.

    Tip

    • If you cannot obtain a company's balance sheet from the SEC EDGAR database or the company's website, contact the company's investor-relations department.

    About the Author

    Lisa S. Kramer is a licensed attorney practicing civil litigation and estates and trusts law in southern Florida. She received her Bachelor of Arts in English from the University of Florida, where she graduated Phi Beta Kappa and cum laude. Kramer earned her Juris Doctor from the University of Florida Levin College of Law.

    Photo Credits

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