Bank of america debt to income ratio

The debt-to-equity (D/E) ratio is a leverage ratio that shows how much a company's financing comes from debt or equity. A higher D/E ratio means that more of a company's financing is from debt versus issuing shares of equity. Banks tend to have higher D/E ratios because they borrow capital in order to lend to customers. They also have substantial fixed assets, i.e., local branches, for example.

Table of Contents Show

Calculating the D/E Ratio
The D/E Ratio and Risk
What Level of Debt-to-Equity Is Considered Desirable?
How to calculate your debt-to-income ratio
What is debt
What is a good debt
Is a 50% debt

Calculating the D/E Ratio

The D/E ratio is calculated as total liabilities divided by total shareholders' equity. For example, if, as per the balance sheet, the total debt of a business is worth $60 million and the total equity is worth $130 million, then the debt-to-equity is 0.46. In other words, for every dollar in equity, the firm has 46 cents in leverage. A ratio of 1 indicates that creditors and investors are balanced with respect to the company’s assets. The D/E ratio is considered a key financial metric because it indicates potential financial risk.

The D/E Ratio and Risk

A relatively high D/E ratio commonly indicates an aggressive growth strategy by a company because it has taken on debt. For investors, this means potentially increased profits with a correspondingly increased risk of loss. If the extra debt that the company takes on enables it to increase net profits by an amount greater than the interest cost of the additional debt, then the company should deliver a higher return on equity (ROE) to investors.

However, if the interest cost of the extra debt does not lead to a significant increase in revenues, the additional debt burden would reduce the company's profitability. In a worst-case scenario, it could overwhelm the company financially and result in insolvency and eventual bankruptcy.

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What Is Considered A High Debt-To-Equity Ratio?

What Level of Debt-to-Equity Is Considered Desirable?

A high debt-to-equity ratio is not always detrimental to a company's profits. If the company can demonstrate that it has sufficient cash flow to service its debt obligations and the leverage is increasing equity returns, that can be a sign of financial strength. In this case, taking on more debt and increasing the D/E ratio boosts the company’s ROE. Using debt instead of equity means that the equity account is smaller and the return on equity is higher.

Bank of America's D/E ratio for the three months ending March 31, 2019, was 0.96. In March 2009, during the financial crisis, the ratio reached 2.65, according to Macrotrends.

Typically, the cost of debt is lower than the cost of equity. Therefore, another advantage in increasing the D/E ratio is that a firm’s weighted average cost of capital (WACC), or the average rate that a company is expected to pay its security holders to finance its assets, goes down.

Overall, however, a D/E ratio of 1.5 or lower is considered desirable, and a ratio higher than 2 is considered less favorable. D/E ratios vary significantly between industries, so investors should compare the ratios of similar companies in the same industry.

In the banking and financial services sector, a relatively high D/E ratio is commonplace. Banks carry higher amounts of debt because they own substantial fixed assets in the form of branch networks.

In addition to your credit score, your debt-to-income (DTI) ratio is an important part of your overall financial health. Calculating your DTI may help you determine how comfortable you are with your current debt, and also decide whether applying for credit is the right choice for you.

When you apply for credit, lenders evaluate your DTI to help determine the risk associated with you taking on another payment. Use the information below to calculate your own debt-to-income ratio and understand what it means to lenders.

How to calculate your debt-to-income ratio

Your debt-to-income ratio (DTI) compares how much you owe each month to how much you earn. Specifically, it’s the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt. To calculate your debt-to-income ratio:

Step 1:

Add up your monthly bills which may include:

Monthly rent or house payment
Monthly alimony or child support payments
Student, auto, and other monthly loan payments
Credit card monthly payments (use the minimum payment)
Other debts

Note: Expenses like groceries, utilities, gas, and your taxes generally are not included. See the FAQs for more information.

Step 2:

Divide the total by your gross monthly income, which is your income before taxes.

Step 3:

The result is your DTI, which will be in the form of a percentage. The lower the DTI, the less risky you are to lenders. For more information, see Understand what your ratio means.

What is debt

Most lenders want your debt-to-income ratio to be 36% or less, but the ratio that works best for you is the one that you can comfortably afford. Your likelihood to repay the loan. Your payment history and credit score are indicators to lenders of your likelihood to make payments in the future.

What is a good debt

What do lenders consider a good debt-to-income ratio? A general rule of thumb is to keep your overall debt-to-income ratio at or below 43%.

Is a 50% debt

As a rule of thumb, you want to aim for a debt-to-income ratio of around 36% or less, but no higher than 43%. Here's how lenders typically view DTI: 36% DTI or lower: Excellent. 43% DTI: Good.

What debt

Standards and guidelines vary, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI.