Debt Levels

• The balance sheet equation is assets equals debt and equity. Equity does not have to be paid back, but debt does --- it represents a claim against future earnings. For this reason, investors do not like to see high debt. However, it is difficult to measure debt levels on a dollar basis. As a result, analysts use debt ratios such as the debt to assets ratio or the debt to equity ratio as a way to compare debt levels against other companies.
  
  

Debt to Assets & Debt to Equity

• The debt-to-assets ratio is calculated by dividing total liabilities by total assets. Debt-to-equity is calculated by dividing total liabilities by total stockholders' equity. All three accounts can be found on the balance sheet. In general, the higher the ratio is, the higher the company's debt levels are.
  
  

Industry Average

• Comparing these ratios against companies which are not in the same industry is not a useful exercise. Every industry has an average debt level, which can help a company to set a debt indicator for internal use or for vendors. You can look up the average debt level by taking an average of the top five competitors in the industry. Set your internal debt level goals above this mark.
  
  

Setting Debt Indicators

• A debt indicator is an indicator of financial risk. An increase in debt means the company is limited in terms of what it can do in the future. An increase in the debt ratio can also be due to decreases in assets or stockholders' equity, which can occur when a company is paying off debt. Setting a debt indicator below company goals and industry averages can help to make sure debt levels are monitored and don't increase beyond acceptable levels.