Debt ratios are crucial metrics in stock analysis as they provide insights into a company's financial leverage and its ability to meet its debt obligations.

Depending on the other variable in the ratio, debt ratios can give great insight into how well the company can manage its debt obligations and if not, where the major issues may lie.

Here are some commonly used debt ratios used in stock analysis:

• Debt-to-Equity Ratio (D/E): Indicates the proportion of a company's financing that comes from debt compared to equity. A higher ratio implies higher financial leverage
• Interest Coverage Ratio: Measures a company's ability to cover its interest expenses with its operating income. A higher ratio suggests better debt-servicing capacity
• Debt Ratio: Shows the proportion of a company's assets financed by debt. A lower ratio indicates less reliance on debt for asset financing
• Debt to Capitalization Ratio: Reflects the percentage of a company's capitalization that comes from debt. A higher ratio implies higher financial risk
• Current Ratio: Measures a company's short-term liquidity. While not a direct debt ratio, it helps assess a company's ability to cover its short-term liabilities
• Quick Ratio (Acid-Test Ratio): Similar to the current ratio but excludes inventory. Provides a more conservative measure of a company's ability to meet short-term obligations

Debt Ratio Formulas

Most debt ratios have quite straightforward formulas that are easy to calculate. Here are the formulas for the aforementioned debt ratios:

Debt to Equity Ratio = Total Debt/Total Equity

Interest Coverage Ratio = EBIT/Interest Expense

Debt Ratio = Total Debt/Total Assets

Debt to Capitalization Ratio = Total Debt/(Total Debt + Total Equity)

Current Ratio = Current Assets/Current Liabilities

Quick Ratio = (Current Assets - Inventory)/Current Liabilities

Using these debt ratios, investors can assess the ability of a company to pay off its debts. If the ratios show high values, this may mean that the company is overburdened with debt, which could cause difficulties in the long term. 

Debt Ratio Example - Apple Stock

To better understand how debt ratios work in practice, we can calculate the debt ratio of Apple Inc to see how well the company can manage its debt load. 

According to the 2022 full year financial report, Apple has a total debt figure of $111,88 billion and assets over $352,58 billion.

The debt to asset ratio adds up to 0.317, which means that almost a third of Apple’s assets are derived from debt. 

Such a ratio may be problematic for most other companies, but since Apple is a consistently profitable corporation with global reach, the debt ratio is of less concern to its long-term shareholders. 

• The debt ratio is a financial measure that indicates the company’s ability to pay its financial liabilities while providing insight regarding its overall financial health 
• There are various debt ratios, such as debt-to-equity, debt-to-assets, the current ratio, quick ratio, and more, with each indicating how a company’s debt relates to other financial metrics 
• A high debt ratio could mean that the company does not have the ability to easily pay back its debt, leading to potential insolvency issues in the future
• Investors use such metrics to decide whether a stock is viable as a long-term investment or not and how likely solvency issues may be for the company