Scenario presets
Balance Sheet & Covenant Inputs
Solvency & Leverage Metrics
Calculating solvency...
- Debt Ratio (Debt / Total Assets)
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- Total financial debt
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- Equity Ratio (Equity / Total Assets)
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- Stockholders' equity
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- Debt-to-Equity (D/E)
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- Equity Multiplier (Assets / Equity)
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- Debt-to-Capital ratio
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- Implied Return on Equity (ROE)
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- Borrowing headroom to covenant limit
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Sensitivity Analysis 1: Total Debt vs. Total Assets on Debt Ratio %
Debt-to-assets percentage across loan issuances/paydowns and asset base expansion/write-downs.
| Total Debt \ Total Assets | -20% | -10% | Base | +10% | +20% |
|---|
Sensitivity Analysis 2: Debt Ratio % vs. Operating ROA % on Magnified ROE %
DuPont financial leverage magnification: how debt gearing amplifies return on equity across operating performance.
| Debt Ratio \ ROA % | -2.0% | -1.0% | Base | +1.0% | +2.0% |
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Capital Structure & Funding Composition
| Funding Component | Amount ($) | % of Total Assets | Category |
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Formulas and worked example
- Debt Ratio = Total Debt / Total Assets
- Total Liabilities to Assets = Total Liabilities / Total Assets
- Equity Ratio = Shareholders' Equity / Total Assets = 1 - (Total Liabilities / Total Assets)
- Debt-to-Equity (D/E) = Total Debt / Shareholders' Equity
- Equity Multiplier = Total Assets / Shareholders' Equity = 1 / Equity Ratio
- Implied ROE = Return on Assets × Equity Multiplier
- Borrowing Headroom = Max(0, [Covenant Ceiling % × Total Assets] - Total Debt)
A utility company holds $25,000,000 in short-term debt, $115,000,000 in long-term bonds, and $20,000,000 in operating liabilities against $260,000,000 in total assets. Total debt is $140,000,000, giving a Debt Ratio of 53.85%. Shareholders' equity equals $100,000,000 (38.46% equity ratio). The equity multiplier is 2.60x. At a 6.5% return on assets, financial leverage magnifies ROE to 16.90%. Under a 65% maximum bank covenant ($169,000,000 ceiling), remaining borrowing headroom is $29,000,000.
Self-check quiz
1. The Debt Ratio formula evaluates:
2. An increase in a company's Debt Ratio, all else held equal:
3. If a company has a 60% Debt-to-Assets ratio, its implied Debt-to-Equity ratio (assuming no other liabilities) is approximately:
4. Regulated electric utilities can comfortably carry higher debt ratios than tech startups because:
Frequently asked questions
What is the Debt Ratio and what does it measure?
The Debt Ratio (Total Debt to Total Assets) measures the proportion of a company's total asset base financed by creditors and lenders rather than equity shareholders. A higher ratio indicates greater financial leverage and potential solvency risk.
What is the difference between the Debt Ratio and the Debt-to-Equity (D/E) Ratio?
The Debt Ratio compares total debt to total assets (D / A), while the Debt-to-Equity ratio compares total debt directly to shareholders' equity (D / E). Both evaluate financial leverage, but Debt Ratio scales between 0% and 100%, whereas D/E can exceed 100% or become negative if equity is depleted.
How does the Debt Ratio impact Return on Equity (ROE) via the Equity Multiplier?
Under the DuPont framework, Return on Equity equals Return on Assets multiplied by the Equity Multiplier (Total Assets / Equity). A higher Debt Ratio shrinks the equity base relative to assets, boosting the Equity Multiplier and magnifying ROE, but also increasing bankruptcy and interest risk.
What is considered a healthy or safe Debt Ratio?
A Debt Ratio under 40% is considered conservative and safe. Stable capital-intensive industries such as utilities and telecom regularly operate comfortably at 50% to 65% debt ratios due to predictable cash flows, whereas ratios above 70% to 80% indicate aggressive leverage or financial distress.