Formula
Debt ratio = total liabilities ÷ equity × 100 (%)
With liabilities of KRW 80 billion and equity of KRW 100 billion, the debt ratio is 80%.
Definition
The debt ratio is a company's total liabilities divided by its equity. It shows as a percentage how much borrowed money there is for each KRW 1 of shareholders' money. A debt ratio of 100% means equity and liabilities are equal, and 200% means the company has raised twice its equity through debt.
Debt itself is not bad. The right amount of debt is a lever that grows the business. But when liabilities are too large relative to equity, interest and principal payments weigh on the company when the economy slows or interest rates rise. The debt ratio checks whether that weight is bearable.
At Jupick, the debt ratio is the core metric of the financial stability area (35% of the overall grade), used with the current ratio and interest coverage to assess whether the company has the strength to carry the weight of its debt.
How to read it
In general, a lower debt ratio is read as more stable finances. 100% or below is commonly called stable, and above 200% a heavy burden. In Jupick's strengths and weaknesses summary, 60% or below is generally labeled “Low debt burden” and 150% or above “Heavy debt burden”.
Sector differences are very large, though. In finance (banks, insurers, securities firms), putting other people's money to work is the business itself, so a debt ratio of several hundred percent is normal, and sectors such as construction and shipbuilding, where advance payments from customers are booked as liabilities, also show high figures. Applying a manufacturing yardstick to these sectors as is does not work.
The quality of the debt matters too. The same amount of liabilities carries a different kind of risk depending on whether it is interest-bearing borrowing or trade payables and customer advances that are not yet due.
Debt ratio across the market now
The values that fall at each point when the stocks Jupick covers are lined up by Debt ratio, smallest to largest. Positions in the line are used instead of an average because a few unusually large values can drag a single average a long way.
KoreaBased on 198 stocks
| Lowest 25% | Middle | Highest 25% |
|---|---|---|
| 42% | 89% | 195% |
Smallest value 2%, largest value 1489%
Of the major Korean stocks, only 198 made it into this table. Left out: 2 stocks whose value is not a measured one.
OverseasBased on 172 stocks
| Lowest 25% | Middle | Highest 25% |
|---|---|---|
| 43% | 70% | 161% |
Smallest value 0%, largest value 1388%
Of the major overseas stocks, only 172 made it into this table. Left out: 27 stocks whose value is not a measured one.
Stocks are rarely left out at random. Companies for which a metric does not hold, or for which the source gives no value, tend to be the ones in weaker shape, so the stocks left in the table are the ones in better condition. The middle value of such a table leans to the favorable side compared with the whole market, and the more stocks are left out, the more it leans.
How to read each range
- Lowest 25%
- The quarter with the least borrowed money relative to equity. The weight of debt is light, but this can also be read as the company using so little debt that it takes fewer chances to grow the business.
- Middle half
- The weight of debt is in the common range for the market. This band is wide and often splits above and below 100%, so comparing with the median shown in the table helps.
- Highest 25%
- The quarter with the most borrowed money relative to equity. Finance, whose core business is putting other people's money to work, and construction and shipbuilding, where customer advances are booked as liabilities, land here for structural reasons. Reading this band as a warning sign without looking at the sector is often wrong.
The two values at either end of the table above are the boundaries that split the stocks into three groups. What it means to belong to each group is written above.
Two stocks that fall just either side of a boundary have practically the same value. Being in different groups does not by itself make them different. The boundaries are drawn again from each day’s sample, so a company can change groups even when nothing about it has changed.
Lowest and highest describe the order of size only, not good or bad. The data is updated once a day.
Stocks with a low debt ratio now
- 1AOld Dominion Freight Line, Inc.0%
- 2BCopart, Inc.1%
- 3AMonster Beverage Corporation1%
- 4BROBOTIS2%
- 5APalantir Technologies Inc.2%
Stocks on Jupick's watchlist with a measured debt ratio, sorted from the lowest.
Points to watch
- Absolute comparisons that ignore the sector are misleading. The high debt ratio of a financial company cannot be judged by the same yardstick as a manufacturer's.
- Even with a low debt ratio, a company can be at risk when repayments are concentrated in debts due soon (current liabilities), so the ratio needs to be read with the current ratio.
- As capital impairment advances and equity becomes very small, the debt ratio can shoot up to hundreds or thousands of percent, or the calculation loses its meaning.
- The debt ratio is a book figure at a single point, the balance sheet date, so there is room to make it look better, for example by repaying debt temporarily just before that date.