What is a good debt to capital ratio?
According to HubSpot, a good debt-to-equity ratio sits somewhere between 1 and 1.5, indicating that a company has a pretty even mix of debt and equity. A debt to total capital ratio above 0.6 usually means that a business has significantly more debt than equity.
From a pure risk perspective, debt ratios of 0.4 or lower are considered better, while a debt ratio of 0.6 or higher makes it more difficult to borrow money. While a low debt ratio suggests greater creditworthiness, there is also risk associated with a company carrying too little debt.
If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.
Debt-to-Capital Ratio vs.
This ratio refers to how much of a company's assets are financed with debt. If a company's debt ratio, which is debts divided by assets, is more than one that means the company has more debt than assets. On the other hand, a ratio below one means a company's assets outweigh its debts.
Interpreting the Debt Ratio
If the ratio is over 1, a company has more debt than assets. If the ratio is below 1, the company has more assets than debt. Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low.
According to HubSpot, a good debt-to-equity ratio sits somewhere between 1 and 1.5, indicating that a company has a pretty even mix of debt and equity. A debt to total capital ratio above 0.6 usually means that a business has significantly more debt than equity.
35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance. Private mortgage insurance.
Your debt-to-income (DTI) ratio is how much money you earn versus what you spend. It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”
A general rule of thumb is to keep your overall debt-to-income ratio at or below 43%.
How do I fix my debt ratio?
- Increase the amount you pay monthly toward your debts. Extra payments can help lower your overall debt more quickly.
- Ask creditors to reduce your interest rate, which would lead to savings that you could use to pay down debt.
- Avoid taking on more debt.
- Look for ways to increase your income.
A negative debt-to-capital ratio can show that a business might carry more investment risk than a business with a positive ratio. Any investors looking to lend may require such a business to provide its ratios and numbers before approving a loan.
For lenders and investors, a high ratio means a riskier investment because the business might not be able to make enough money to repay its debts. If a debt ratio is lower - closer to zero - this often means the business hasn't relied on borrowing to finance operations.
Lenders prefer bad debt to sales ratios under 0.4 or 40%.
The debt-to-equity ratio measures how much debt a company has relative to its shareholders' equity. It indicates how much leverage a company is using to finance its assets and operations. A high debt-to-equity ratio means that a company has more debt than equity, which implies a higher risk of default and insolvency.
Generally, an acceptable DTI ratio should sit at or below 36%. Some lenders, like mortgage lenders, generally require a debt ratio of 36% or less.
Generally, a working capital ratio of less than one is taken as indicative of potential future liquidity problems, while a ratio of 1.5 to two is interpreted as indicating a company is on the solid financial ground in terms of liquidity.
| Industry | Typical Debt to Equity Ratio Range |
|---|---|
| Consumer Staples | 0.2 – 0.7 |
| Healthcare | 0.3 – 0.8 |
| Technology (Software) | 0.2 – 0.6 |
| Financial Services (Banks) | 4.0 – 8.0 |
Alphabet(Google)'s debt to equity for the quarter that ended in Mar. 2024 was 0.10. A high debt to equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.
Key takeaways
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
How much debt is okay for a small business?
If your business debt exceeds 30 percent of your business capital, this is another signal you're carrying too much debt. The best accounting software can help you track your business debt, manage your cash flow, and better understand your business' financial situation.
One rule of thumb is that the cost of your home should not exceed three times your income. On a salary of $70k, that would be $210,000. This is only one way to estimate your budget, however, and it assumes that you don't have a lot of other debts.
How much do I need to make to buy a $300K house? You'll likely need to make about $75,000 a year to buy a $300K house. This is an estimate, but, as a rule of thumb, with a 3 percent down payment on a conventional 30-year mortgage at 7 percent, your monthly mortgage payment will be around $2,250.
Applying the 28/36 rule, a $130,000 annual earner should keep housing costs below $3,033. However, there are many other factors besides just your income that shape how much house you can comfortably afford. Credit score: A strong credit score is important when you apply for a home loan.
A company's debt ratio can be calculated by dividing total debt by total assets. A debt ratio that's less than 1 or 100% is considered ideal, while a debt ratio that's greater than 1 or 100% means a company has more debt than assets.
