In this article, I’m going to show you how to calculate a company’s debt ratio. So the debt ratio is usually calculated by taking a company’s total liabilities and dividing them by the total assets. In other words, how highly leveraged is the company. The higher this number is the more highly leveraged. The debt ratio is a measure of solvency.
This is going to tell you the percentage of assets that are being funded by debt. In general, a debt ratio of less than 30% suggests a company isn’t as efficient as it could be, whereas a ratio of more than 75%, let’s say, suggests possible bankruptcy.
On average, most debt ratios are around 60% as companies tend to finance more assets with debt than equity. This is mainly due to debt tax advantages. Interest expense is tax-deductible for businesses. The company has more the relying on debt to fund their Assets. Now bear in mind that not everything in total liabilities is always going to be considered what we would call debt when we think of debt within like borrowing money from a bank and so forth, but unearned revenue is a liability, but you Wouldn’t really think of that as debt. So sometimes people will take total debt like short-term, debt and long-term debt. And they’ll use that in the numerator and then divide that by total assets. Okay, so I’m going to use this here because this is a pretty common formula for calculating Debt Ratio. Total liabilities divided by total assets. And I’m going to calculate the debt ratio for Twitter.
So, let’s take a look at their balance sheet. You can see that their total liabilities as of December 31st, 2018. They had over 3billion dollars of liabilities and then in terms of total assets, Twitter had over 10 billion dollars in assets. So you can see 3 billion divided by 10 billion. So it’s going to be around 0.3, but let’s do the calculations. So we take the $3,356,978 billion dollars and divide it by a little more than 10 billion which is $10,162,572 and that’s going to give us 0.33 sometimes instead of as a decimal, Sometimes people express that as a percentage and you could think about it like this 33% of Twitter’s assets are being funded by debt or liabilities if you want to think about it like that.