Ratio of Liabilities to Stockholders' Equity

Out of the way world.  I've got my sassy pants on today." - Unknown

What Does that Look Like?

The basic financial statements are useful to bankers, creditors, stockholders and others in analyzing and interpreting the financial performance and condition of a company.  One tool we will share  is useful in analyzing the ability of a company to pay its creditors.

​The relationship between liabilities and stockholders' equity is expressed as a ratio of liabilities to stockholder's equity, is computed as following example:

​Ratio of Liabilities to Stockholders' Equity = Total Liabilities/Total Stockholder's equity
​Ratio of Liabilities to Stockholders' Equity = $400/$26,050 = 0.015

​The rights of creditors to a business's assets come before the rights of the owners or stockholders.  Thus, the lower the ratio of liabilities to stockholders' equity, the better able the company is to withstand poor business conditions to pay its obligations to creditors.