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3 Good Long-Term Debt to Equity Ratios

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March 28, 2023


What’s Inside

An Overview

The long-term debt ratio represents the proportion of a company's assets backed by long-term debt. This includes loans and other financial commitments that last longer than a year. It is a metric that gives a broad picture of a company's long-term financial status, including its capacity to satisfy its financial commitments for existing loans. Many factors, such as company debts, assets and equity, play a part in determining the long-term debt ratio of a company. Hence, it is vital to know what is a healthy debt-to-equity ratio, debt-to-assets ratio and debt-to-capital ratio for those interested in investments.

Importance of Long-Term Debt Ratio

The long-term debt ratio can measure a company’s financial health. The ratio result deemed 'healthy' differs from industry to industry. However, we can say that a drop in a company's long-term debt ratio over the years may indicate that it is becoming less reliant on debt to build its business. For investors, such ratios are a good yardstick to compare different companies’ long-term financial conditions. 

3 Beneficial Long-Term Debt Ratios

Debt-to-Assets Ratio = Total Debt / Total Assets

It is a leverage ratio that indicates how much debt a firm has compared to its assets. With this indicator, investors may compare one company's leverage with other firms in the same industry. This information can represent how financially solid a firm is. The greater the ratio, the greater the degree of leverage (DoL), hence the greater the risk of investing in that firm.

Debt-to-Equity Ratio = Total Debt / Total Equity

It is used to analyse financial leverage by dividing a firm's overall liabilities by equity. The D/E ratio is a significant indicator in corporate finance. It measures how much a firm borrows to fund its operations rather than using its own resources. A debt-to-equity ratio is a gearing ratio. A good debt-to-equity ratio percentage should not exceed 2.0. A debt-to-equity ratio of 2 implies that the firm gets one-third from shareholder equity and two-thirds of its capital from debt.

Debt-to-Capital Ratio = Today Debt / (Total Debt + Total Equity)

It analyses a company's financial leverage. The debt-to-capital ratio is computed by dividing the company's interest-bearing debt, including long- and short-term obligations, by total capital. Total capital includes all interest-bearing debt and shareholders' equity, which may comprise preferred stock, common stock and minority stake.

Wrapping Up

The debt ratio is a measure that evaluates a company's total debt as a proportion of its total assets. A high debt ratio suggests that a corporation is overly leveraged and may have borrowed more money than it is capable of repaying. The essential premise for the debt ratio stays the same whether you want to invest in the Indian stock market or trade in US stocks.

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Frequently Asked Questions

What are the three debt ratios?

Debt-to-Assets Ratio, debt-to-equity ratio and debt-to-capital ratio are the three important debt ratios.

What is the debt-to-asset ratio formula?

The following formula can be used to determine the debt-to-assets ratio of a company: 

Debt-to-Assets Ratio = Total Debt / Total Assets.

What is the debt-to-capital ratio?

The debt-to-capital ratio analyses a firm's financial leverage. The debt-to-capital ratio is computed by dividing the company's interest-bearing debt, including long- and short-term obligations, by total capital.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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