A Debt to Enterprise Value Ratio Calculator helps investors, analysts, and financial professionals measure the proportion of a company's enterprise value that is financed through debt. This ratio is an important metric in corporate finance, as it provides insights into a company’s leverage and overall financial stability.
A lower ratio suggests that a company relies more on equity financing, making it less risky for investors. A higher ratio indicates that a company depends heavily on debt, which may lead to higher financial risk. This ratio is commonly used in mergers and acquisitions, investment analysis, and risk assessment for lenders and stakeholders.
Formula for Debt To Enterprise Value Ratio Calculator
The formula used to calculate the Debt to Enterprise Value Ratio is:
Debt to Enterprise Value Ratio = (Total Debt) ÷ (Enterprise Value)
Where:
Total Debt = Short-term Debt + Long-term Debt
Enterprise Value (EV) = Market Capitalization + Total Debt - Cash and Cash Equivalents
This formula measures how much of a company’s value is tied to debt rather than equity. A lower ratio (below 40%) is generally considered safer, while a higher ratio (above 50%) may indicate increased financial leverage and potential risk.
Debt to Enterprise Value Ratio Reference Table
To simplify financial analysis, the following table provides estimated Debt to Enterprise Value Ratios based on different levels of debt and enterprise value.
| Total Debt ($) | Market Capitalization ($) | Cash & Equivalents ($) | Enterprise Value ($) | Debt to Enterprise Value Ratio | Financial Risk Level |
|---|---|---|---|---|---|
| 500,000 | 5,000,000 | 200,000 | 5,300,000 | 0.094 (9.4%) | Low Risk |
| 1,000,000 | 5,000,000 | 300,000 | 5,700,000 | 0.175 (17.5%) | Low Risk |
| 3,000,000 | 6,000,000 | 500,000 | 8,500,000 | 0.35 (35%) | Moderate Risk |
| 5,000,000 | 7,000,000 | 800,000 | 11,200,000 | 0.45 (45%) | High Risk |
| 8,000,000 | 8,000,000 | 1,000,000 | 15,000,000 | 0.53 (53%) | Very High Risk |
A Debt to Enterprise Value Ratio below 40% is generally considered financially stable. A ratio above 50% suggests potential financial instability, making it harder for a company to secure loans or attract investors.
Example Calculation
A company has $4,000,000 in total debt, a market capitalization of $10,000,000, and cash and cash equivalents of $2,000,000.
Step 1: Calculate Enterprise Value
Enterprise Value = 10,000,000 + 4,000,000 - 2,000,000
Enterprise Value = $12,000,000
Step 2: Apply the Debt to Enterprise Value Ratio Formula
Debt to Enterprise Value Ratio = 4,000,000 ÷ 12,000,000
Step 3: Compute the Result
Debt to Enterprise Value Ratio = 0.33 (33%)
This means that 33% of the company’s enterprise value is finance through debt, which falls within the moderate risk level.
Most Common FAQs
A Debt to Enterprise Value Ratio below 40% is consider financially safe. A ratio between 40% and 50% indicates moderate risk, while a ratio above 50% suggests high financial leverage and potential financial instability.
A company can improve its Debt to Enterprise Value Ratio by increasing market capitalization through growth, reducing debt through repayments, or holding more cash reserves. Lowering debt and improving profitability can help reduce financial risk and attract investors.
Investors use the Debt to Enterprise Value Ratio to assess a company’s financial health and risk level before making investment decisions. A lower ratio indicates a more stable company with lower financial leverage, making it a safer investment.