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Debt Ratio - Meaning, Formula, Examples, Step by Step Calculation - YouTube
Channel: WallStreetMojo
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hello everyone welcome to the channel of
Wallstreetmojo today we are going to
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discuss on the tutorial of debt ratio
the debt ratio as you can see in this
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yellow box debt ratio is one of the most
used solvency ratio by the investors
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so let's directly jump on the debt ratio
formula it is one of the most used
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solvency ratio by the investor and it's
pretty easy to calculate to let's have a
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look at the formula of the debt ratio
and get into the nitty-gritty now the
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debt ratio formula is very simple
actually the debt ratio is equal to the
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total liabilities divided by the the
total asset it is as simple as that so
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basically we are comparing as you can
see the total liability in assets all
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you need to do is to look at the balance
sheet and find out where a firm has
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enough total assets to pay off its total
liability if you go in the explanation
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part of the debt ratio formula for
investors the financial statement are
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everything they look at all for statements and make their judgments one
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of the most important financial
statement is balance sheet by looking at
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the balance sheet the investors are able
to know what's working for a come in
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what's need to be improved so two of the
most important items on the balance
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sheets are assets and liabilities by
looking at the total assets and total
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liabilities investors are able to
understand with the form enough
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assets to pay off the liabilities and
that's exactly what we call as debt
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ratio see by using this ratio we
calculate the proportionally total
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assets and total liabilities and by
looking at them we get to know the
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stands of the company at any stage so
what is the use of the debt ratio
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formula let's look at that this ratio is
useful for two groups of people the
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first group is a top management of the
company
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who's directly responsible for the
expansion or contraction of a company by
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using this ratio the top management sees
whether the company has enough resources
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to pay off its obligation the second
group is the investors who would like to
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see the position of the company before
they ever put in the money into the
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company and that's why the investors
needs to know whether the form has
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enough assets to bear the expense of the
debt and other obligations
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so this ratio also measures the
financial leverage of the company and it
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also tells us the investors how leverage
the form is if the form has a higher
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level of liability is compared to the
assets then the form has more financial
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leverage and vice versa the case okay so
now let's look at the example of the
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debt ratio formula let's take a very
practical example to illustrate this
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ratio boom company has the following
details that we are going to discuss
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here the current asset non-current asset
details are I'm just trying to push the
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details over here the current
liabilities then we have the non current
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liabilities I'm just writing live over
here so this are all the details okay
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and let's put the amount this is the
particulars and this are the amounts in
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dollars ok now the current assets is
close enough to 30 thousand then we have
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the non current assets as close enough
to 3 lakh dollars current liability
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let's take as 40,000 and non current
liabilities as $70,000 everything is in
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dollars now find out the debt ratio of
boom company this is we are discussing
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for boom company okay
in the above example we can see that we
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need to total the current and
non-current assets and also the current
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liabilities and non current liabilities
so the total assets are current assets
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+ non current assets so the current
assets and the non current assets is 30000
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+ 3 lakh that is 3 lakh 30000 okay so I'm just quickly going
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to write over here as is equal to 30000 + 3 lakh so that's the total
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of the total assets are current and
non-current now the total liabilities
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are current liabilities and non current
liabilities so let's make the total
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40,000 + 70,000 that's 1 lakh 10000
okay so this are the two details okay
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now the debt ratio formula is the total
liability
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/ the total asset so what is the total
liability over here as you can see one
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lakh ten okay so our final answer is
going to be is equal to the total
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liabilities divided by the the total
assets that is three lakh thirty so our
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debt ratio comes to 0.3333 okay
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the ratio of the boom company is close
enough to 0.33 so to
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know whether the disproportion between
the total liabilities and total asset is
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healthy or not we need to see the
similar companies under the same
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industry if the ratio of those companies
also in the similar range it means boom
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company is doing quite well in the
normal situation as lower as this ratio
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can be better as in terms of the
investment in solvency the debt ratio in
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terms of Excel with template you know we
can take a look at that and this is very
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simple I mean you need to provide the
two inputs of total liabilities in total
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asset and you can easily calculate the
ratio in the template as you can see in
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this particular template whatever we
have calculated in our excel sheet is
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over here you can see the current assets
non current the total assets three lakh
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thirty again the current liabilities
non-current liabilities forty plus
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seventy one hundred and one like ten
thousand so the total asset total
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liabilities and total asset which gives
us the debt ratio for the boom company
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now basically you can use this debt
ratio calculator to calculate your debt
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ratio okay so let's put our total
liability as 2 lakh and a total asset
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as 1 lakh so that gives us our debt
ratio formula is two times so the debt
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is two times the total assets if we debt
our if we changed a debtor one over here
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and two over here we will get the debt
ratio formula is 0.5 X it is usually
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considered to as a greater it's a good
number it's a good way to calculate okay
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and if we put things over here as 5 and 2 or 5 and 1 over here you
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can see the debt ratio has increased to
5 see but 5 X is a very
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leveraged company like you know
companies like Jet Airways it has capital
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intensive company they have a debt close
enough to 12000 crores that is
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in terms of in INR the in the that's the Indian currency INR will if
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you see that is a highly leveraged
company and that the debt is close
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enough to 12000 that means it's that ratio is close enough to 4.5 X
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which is really high so such companies are really risking their
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cash flows their operations because
majority of their profits or funds are
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blocked in interest so the company
should not be highly leveraged or even
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if they are then they should set off
with some of the fixed deposits if they
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have any so that you know you can set
off the interest of the fixed deposit
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and the interest of the the interest of
the debt that you are going to pay so
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this is a debt calculator you can
calculate the debt ratio with the help
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of for this calculator I hope you have
got the concept regarding the debt ratio
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thank you
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