Learn some of the most important financial ratios with Transtutors

1. Decoding Ratios: Debt to
Equity, Debt to Asset,
Equity Multiplier

2. You must agree that
ratios play a
significant role in
analyzing the status
of a business.
Let us see three of
such noteworthy
ratios here and
decode them.

3. Solvency Ratios
 Solvency Ratio is a umbrella term that covers all financial ratios
that make a comparison between the capital and the borrowed
funds of an owner.
 Major solvency ratios include
• Debt to Equity Ratio = (Total Debt / Total Equity)
• Debt to Asset ratio = (Total Debt / Total Assets)
• Equity multiplier = (Total Assets/ Total Equity)
 Irrespective of the level of sales, organization must be able to fulfill
its debt obligations, thus, high level of leverage makes business
more prone to downturns in a business cycle
 A higher percentage of equity is viewed as a measure of financial
stability.

4. 1. Debt to Equity Ratio
 Debt to Equity ratio measures the long term solvency and the
capital structure of a company.
 It helps in figuring out the percentage of debt and equity in the
balance sheet of a firm.
 A greater percentage of shareholders equity shows excess of
finance which safeguards the company's leverage.
 Debt to Equity Ratio = (Total debt or liabilities)/ (Total Equity)

5. 2. Debt to Asset Ratio
 The long term solvency and the capital structure of a company is
being judged by Debt to Asset Ratio.
 It shows the percentage of debt in comparison to the assets of a
company i.e. examines how many assets of a company are financed
by debt.
 Debt to assets ratio = (Total debt or liability) / (Total assets)

6. 3. Equity Multiplier
 Equity multiplier ratio helps in analyzing the financial leverage of a
company.
 It examines the use of debt and shareholder’s equity to purchase the
assets that are held by a company.
 Equity multiplier = Total Assets/Shareholder’s equity
 Higher equity multiplier ratio shows that majority of assets are
financed through debt.

7. Du Pont analysis
 Equity multiplier ratio is one of the major components of Du Pont
analysis, which helps in calculating Return on equity.
 Three different aspects viz. profitability, efficiency and the leverage
of a company determine DuPont ROE.
 ROE under Dupont Analysis = (Net income/sales) x (Total
Assets/Total Equity) x (Net income/Total Equity)

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