What this calculator does
Leverage ratios describe how much of a business is funded by borrowing rather than by owners, and whether earnings comfortably cover the interest that borrowing costs. The first three are balance sheet measures; interest coverage is the one that tests affordability.
Debt magnifies returns in both directions. The same operating performance produces higher returns on equity when borrowing is heavy, and heavier losses when things go wrong, which is why the ratios matter more in a downturn than in good times.
The formula
Debt-to-equity divides total debt by total equity, and debt-to-assets divides it by total assets. The equity multiplier is assets over equity, and interest coverage divides operating profit by annual interest expense.
| Term | Meaning |
|---|---|
| Debt-to-equity | Debt divided by equity. A ratio of 1 means equal funding from each. |
| Equity multiplier | Assets divided by equity, showing how far each dollar of equity is stretched. |
| Interest coverage | How many times operating profit covers the interest bill. |
The inputs explained
| Field | What to enter |
|---|---|
| Total debt ($) | Total interest-bearing debt. |
| Total equity ($) | Total shareholders' equity. |
| Total assets ($) | Total assets from the balance sheet. |
| EBIT (operating profit) ($) | Operating profit before interest and tax. |
| Annual interest expense ($) | Total annual interest expense. |
When to use it
Assessing borrowing capacity
Lenders set covenants against these ratios, so knowing where you sit shows what headroom remains.
Comparing companies in a sector
Two businesses with similar operations can have very different risk profiles purely because of leverage.
Stress-testing the interest bill
Interest coverage shows how far profits could fall before the interest becomes unaffordable.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How does the funding mix change the ratios?
The same balance sheet total split three ways between debt and equity.
Questions
What is a safe debt-to-equity ratio?
It varies hugely by industry. Utilities with stable, predictable cash flows routinely run above 2; a business with volatile earnings would be uncomfortable at half that. Compare within a sector rather than against a general rule.
Is debt always bad?
No. Debt is usually cheaper than equity and the interest is often tax deductible, so moderate leverage genuinely lowers the cost of capital. The problem is that it also raises the risk of not being able to meet payments.
What interest coverage is comfortable?
Above about 3 or 4 times generally indicates real headroom. Below 1.5 means a modest decline in profit would leave the interest uncovered, which lenders watch closely.
Why does the equity multiplier matter?
Because it is the leverage term in the DuPont breakdown of return on equity. A high return on equity driven purely by a large multiplier is a leverage story, not an operating one.
For how leverage feeds into return on equity, see the DuPont analysis calculator. For short-term obligations rather than long-term debt, see the liquidity ratios calculator.