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Excel 2007: Financial Analysis
Illustration by Neil Webb

Calculating the debt ratio


From:

Excel 2007: Financial Analysis

with Curt Frye

Video: Calculating the debt ratio

Like private individuals, companies can borrow money to finance their operations. Some mechanisms to borrow money include taking out loans, issuing stock, and selling bonds to raise capital. Also, like private individuals, companies can only borrow so much money before they start to become bad credit risks. One basic measure of a company's relative indebtedness is the debt ratio. To calculate the debt ratio, which is also some times called the total debt ratio, you subtract a company's total equity from total assets, and divide that result by total assets. So, I have a worksheet here, with Shareholders' Equity, Total Assets, and Total Liabilities, which we'll use in a moment.
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  1. 2m 6s
    1. Welcome
      1m 8s
    2. Using the exercise files
      32s
    3. Disclaimer
      26s
  2. 13m 20s
    1. Separating inputs and formulas
      2m 2s
    2. Avoiding common mistakes
      5m 39s
    3. Tracing formula precedents and dependents
      2m 52s
    4. Evaluating Excel formulas step by step
      2m 47s
  3. 18m 40s
    1. Tracking income and expenses using an Excel table
      3m 29s
    2. Creating a Pivot Table from table data
      3m 36s
    3. Pivoting a Pivot Table
      2m 22s
    4. Filtering a Pivot Table
      3m 11s
    5. Adding Pivot Table columns to enhance data analysis
      3m 5s
    6. Tracking cash flow using a Pivot Chart
      2m 57s
  4. 18m 48s
    1. Reading a corporate financial statement
      6m 1s
    2. Introducing common-sizing strategies for analyzing financial statements
      3m 59s
    3. Creating common-sized income statements
      3m 1s
    4. Creating common-sized balance sheets
      2m 53s
    5. Calculating percentage changes in financial statements
      2m 54s
  5. 8m 12s
    1. Calculating earnings per share
      1m 54s
    2. Calculating return on equity and return on assets
      2m 50s
    3. Calculating gross profit margin and net profit margin
      3m 28s
  6. 6m 19s
    1. Calculating the current ratio and quick ratio
      2m 47s
    2. Calculating the average collection period
      1m 56s
    3. Calculating inventory turnover
      1m 36s
  7. 6m 12s
    1. Calculating the equity ratio
      1m 26s
    2. Calculating the debt ratio
      2m 57s
    3. Calculating the times interest earned ratio
      1m 49s
  8. 10m 58s
    1. Calculating simple interest and compound interest
      3m 36s
    2. Applying nominal versus effective interest rates (APR versus APY)
      3m 21s
    3. Calculating the number of days between events
      4m 1s
  9. 13m 32s
    1. Computing the future value of an investment
      3m 30s
    2. Calculating present value
      2m 29s
    3. Calculating net present value
      2m 42s
    4. Calculating internal rate of return
      2m 24s
    5. Calculating NPV and IRR for uneven input periods (XNPV and XIRR)
      2m 27s
  10. 7m 30s
    1. Projecting future results using the Forecast function
      2m 9s
    2. Performing quick forecasts using the Fill handle
      2m 57s
    3. Adding a trendline to a chart
      2m 24s
  11. 22m 28s
    1. Introducing amortization
      2m 20s
    2. Calculating payments on a fully amortized loan
      2m 21s
    3. Calculating payments on a partially amortized loan (balloon payments)
      2m 4s
    4. Calculating interest and principal components of loan repayments
      5m 32s
    5. Introducing depreciation
      2m 1s
    6. Calculating straight line depreciation
      1m 30s
    7. Calculating declining balance depreciation
      3m 24s
    8. Calculating double declining balance depreciation
      3m 16s
  12. 9m 34s
    1. Introducing bonds and bond terminology
      1m 37s
    2. Calculating a bond's yield
      2m 15s
    3. Calculating the value of zero coupon bonds
      3m 18s
    4. Pricing bonds to be offered to investors
      2m 24s
  13. 23s
    1. Goodbye
      23s

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Excel 2007: Financial Analysis
2h 18m Intermediate Aug 25, 2009

Viewers: in countries Watching now:

Numbers and financial data drives today's business world and Excel 2007: Financial Analysis can help decode this information. The proper understanding of these numbers, and the formulas behind them, can be the gateway to corporate and personal success. Microsoft MVP (Most Valuable Professional) Curt Frye teaches basic fluency in corporate finance, enabling users to see the meaning behind essential financial calculations. Curt explains how to review formulas to ensure they have the proper inputs, and shows how to interpret formula output. He also covers how to calculate leverage ratios and amortization and depreciation schedules, as well as forecast future growth. Exercise files accompany this course.

Topics include:
  • Building a financial worksheet with Pivot Tables Reviewing financial statements through common-sized balance sheets Calculating percentage change over time in financial statements Determining profitability ratios and return on investments Studying liquidity and activity ratios through an average collection period Computing the future value of an investment
Subjects:
Business Data Analysis Finance
Software:
Excel
Author:
Curt Frye

Calculating the debt ratio

Like private individuals, companies can borrow money to finance their operations. Some mechanisms to borrow money include taking out loans, issuing stock, and selling bonds to raise capital. Also, like private individuals, companies can only borrow so much money before they start to become bad credit risks. One basic measure of a company's relative indebtedness is the debt ratio. To calculate the debt ratio, which is also some times called the total debt ratio, you subtract a company's total equity from total assets, and divide that result by total assets. So, I have a worksheet here, with Shareholders' Equity, Total Assets, and Total Liabilities, which we'll use in a moment.

Now, before I type in the debt ratio formula, I'd like to point out that I have a copy of the formula here in cell C9. You can see the formula up here in the formula bar. Now, the reason that Excel doesn't treat this formula as a formula, it displays it as text, is because I have an apostrophe here at the start of the entry. Anytime a cell's contents begin with an apostrophe, Excel treats the value as text, regardless of whether it's a number, a currency value, and date, whatever. It just treats it as a string of characters.

So, that's the formula I'll be entering in, without the apostrophe. So Excel treats it as a formula. We have =B6-B5, which is again assets minus equity, divided by B6. Now, because the two values that Excel was using in this formula, B6 and B5, are both currency values, it attempted to display the result as a currency value here, except it doesn't make any sense because it's a ratio. So, I'll change that cell's formatting to a number. Now, we see a debt ratio of 0.39, which is correct.

There are two useful ways you can extend the debt ratio analysis. The first is by dividing the company's total liabilities by its total equity, which gives you the debt-to-equity ratio. The debt-to-equity ratio is an extremely useful tool for analyzing a company's health. The rule of thumb is that manufacturing firms should maintain a debt-to-equity ratio of between 0.5 and 1.5. If a company borrows too much money, it can run into problems servicing its debt. On the other hand, a company that doesn't borrow any money or not enough money might be missing out on opportunities because it's being too conservative.

So, to calculate the debt-to-equity ratio, we divide the company's total liabilities, which are in B7 by its shareholders' equity in B5, press Return, and there is the result. You can also calculate a measure called the Equity Multiplier, which is total assets divided by total equity. The equity multiplier shows a company's total assets per dollar of shareholders' equity. A higher equity multiplier indicates higher financial leverage, which means the company is relying more on debt to finance its assets. So, to calculate the equity multiplier, we divide total assets by shareholders' equity, and there's the result.

The debt ratio, debt to equity ratio, and equity multiplier are all based on the same factors. If you can calculate any one of those ratios, you can calculate the other two.

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