How to Calculate a Long-Term Debt Vs. Equity Ratio

A highly leveraged company may have trouble paying its debts over the long term.

A highly leveraged company may have trouble paying its debts over the long term.

The long-term debt-to-equity ratio measures how much a company owes on debts with maturities exceeding one year versus the amount of equity in the company. The smaller the ratio, the less debt the company has relative to its shareholder equity. However, the ratio is most useful when comparing companies in the same industry because different products require different amounts of capital investment. For example, the amount of money needed for a tractor manufacturer to get a factory up and running is significantly more than for a eBook distributor.

Locate the annual report for the company using the U.S. Security and Exchange Commission's EDGAR system. Private companies have no obligation to release their balance sheets, so you aren't entitled to the information. Companies may also make their annual reports available on their websites or in their prospectuses.

Find the line item for "long-term debt" in the liabilities portion of the balance sheet and the line item for "shareholders' equity" in the assets. Long-term debt refers to debt with a maturity date of more than one year.

Divide the long-term debt by the company's shareholders' equity to find the long-term debt-to-equity ratio. For example, if the company has $5 million in long-term debts and $25 million in equity, the long-term debt-to-equity ratio is 0.2.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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