How to Reduce the Total Debt Ratio by Selling Stock

You don't have to know what a debt ratio is to know that freeing up capital and paying off your creditors will improve the ratio. There are several ratios used to measure debt including debt to equity and debt to assets. In both cases, a ratio of more than 1 indicates that a company has more debt than equity or assets, respectively. In fact, most banks will accept stock for collateral on a loan and will sell the stock should the company default on the loan.

Instructions

1

Review the formula for calculating debt to assets. Debt to assets is a ratio that indicates what proportion of debt a company has relative to its assets. The exact formula is "Total Debt" divided by "Total Assets."

2

Review the formula for calculating debt to equity. Debt to equity is calculated by dividing "Total Liabilities" by "Total Stockholder's Equity." Both of these line items can be found on the balance sheet. Investors use that information to understand how much debt is being used to finance assets.

3

Determine how much stock must be sold in order to improve the ratio. The ideal debt ratio depends on the industry. Look up the average industry ratio on an investment research site on the Internet. This will give you a basis for comparison.

4

Determine a dollar amount, then divide the current share price of the stock into the dollar amount in order to determine how many shares you will need to sell in order to bring the debt ratio down.

5

Contact your broker and make a trade to sell this number of shares. Use a limit order (instead of a market order) in order to guarantee your price.