How to Calculate Debt Ratio Using an Equity Multiplier

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

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.

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