Whether you invest in stocks, own a home or own other assets, it’s important to keep tabs on your investment’s debt and equity percentages. A debt percentage represents the portion of an asset on which creditors have a claim. An equity percentage represents the owner’s stake in the asset. Together, these percentages make up 100 percent of an asset’s value. Because creditors can take over an asset if an owner fails to make her loan payments, a higher debt percentage typically represents more risk. A debt percentage that approaches or exceeds 100 percent is a big red flag.
You can identify the debt and equity percentages of your investments by carefully reviewing company balance sheets
Exploring Company Equity
Locate a company’s balance sheet in its most recent quarterly report on Form 10-Q or annual report on Form 10-K. You can download these forms from the investor relations section of the company’s website or from the U.S. Securities and Exchange Commission’s EDGAR database. Identify the amount of total assets and total liabilities on the balance sheet. Liabilities are a company’s debts. For example, assume a company has $1 billion in total assets and $375 million in total liabilities.
Divide total liabilities by total assets to figure the portion of assets funded by debt. In this example, divide $375 million by $1 billion to get 0.375. Subtract your result from 1.0 to determine the portion funded by equity. In this example, subtract 0.375 from 1.0 to get 0.625.
Multiply your Step 3 and Step 4 results each by 100 to calculate the company’s respective debt and equity percentages. Concluding the example, multiply 0.375 by 100 to get 37.5 percent. Multiply 0.625 by 100 to get 62.5 percent. This means creditors have a claim on 37.5 percent of the company's assets, which is a fairly conservative amount. Stockholders have a stake in the remaining 62.5 percent.
Equity of Real Estate and Other Assets
Add the amount of mortgages, loans or other debts that are attached to an asset to figure the asset’s total debt. For example, assume your home has a $150,000 first mortgage and a $15,000 second mortgage. Add these to get $165,000 in total debt.
Subtract the asset’s total debt from its market value to determine its total equity. You can contact an agent or appraiser who deals with your specific asset type to find its approximate market value. In this example, assume your home is worth $300,000. Subtract $165,000 from $300,000 to get $135,000 in total equity.
Divide the total debt by the asset’s market value and multiply by 100 to calculate the debt percentage. Lenders call this the loan-to-value, or LTV, ratio. In this example, divide $165,000 by $300,000 to get 0.55. Multiply 0.55 by 100 to get an LTV of 55 percent, which means debt makes up 55 percent of your home’s value.
Divide the total equity by the asset’s value and multiply by 100 to determine the equity percentage. Concluding the example, divide $135,000 by $300,000 and multiply by 100 to get 45 percent. This means about 45 percent of your home’s value is yours.
If an asset is worth less than its debt, you’ll get a negative equity percentage and a debt percentage that’s greater than 100. For example, if a $1,000 asset and has $1,200 in debt, 120 percent of its value is debt and -20 percent is equity.
- If an asset is worth less than its debt, you’ll get a negative equity percentage and a debt percentage that’s greater than 100. For example, if a $1,000 asset and has $1,200 in debt, 120 percent of its value is debt and -20 percent is equity.
- What Is a Target Equity Ratio?
- How to Read a Balance Sheet for Total Liabilities & Equity
- Are Debt Securities & Equity Securities Financial Assets?
- Understanding Debt Management Ratios
- Unlevered Return on Equity Vs. Levered Return on Equity
- How to Calculate Your Net Worth Based on Your Present Assets and Liabilities
- How to Calculate an Underwater Mortgage
- How to Calculate Leverage Ratio