Renzo DemartiniIn short
- Write the debt definition above every funding case, and keep the broader liabilities measure beside it.
- Reconcile liabilities, borrowings, cash and equity to the ledger before any ratio is compared.
- Record operations, finance and owner sign-off, and withhold purchase authority until funding documents are signed.
A lender, a board paper and an online guide can each report your leverage ratio and get a different number. The difference is usually the definition of debt.
Before a funding mix is chosen for an acquisition, finance and the owner should agree the definition and tie it to the ledger.
Name the ratio before comparing
Two definitions of debt give 1.50 and 1.13 for the same business on the same day
| Measure | Numerator | Denominator | Result |
|---|---|---|---|
| Total liabilities to equity | A$1,200,000 | A$800,000 | 1.50 |
| Borrowings to equity | A$900,000 | A$800,000 | 1.13 |
Sample balances at 31 October 2026. Ratios rounded to two decimals.
Illustrative figures, not client data.
Both measures use the same balance sheet and answer different questions. Business Queensland’s debt to equity ratio is total liabilities divided by owner’s equity. A lender may count only borrowings and leases. In Australia it is often called gearing: the RBA notes that ‘gearing is usually measured as the ratio of debt to equity’.
Write the agreed definition above every funding case. Ask the lender how it calculates the ratio before you treat either measure as a lending test.
Reconcile the balance sheet
A$900,000 of borrowings sit inside A$1,200,000 of liabilities that agree to the ledger
| Ledger balance | Amount | Funding-paper treatment |
|---|---|---|
| Bank loans | A$700,000 | Borrowings |
| Lease liabilities | A$200,000 | Borrowings |
| Trade payables | A$180,000 | Other liabilities |
| Payroll accruals | A$60,000 | Other liabilities |
| Other accruals | A$60,000 | Other liabilities |
| Total liabilities | A$1,200,000 | Agrees to the ledger |
| Assets | A$2,000,000 | Includes cash of A$200,000 |
| Equity | A$800,000 | Assets less liabilities |
Illustrative figures, not client data.
Finance matches the loan statements, the lease register and the accrual schedules to the ledger. AASB 16 requires a lessee to present or disclose ‘lease liabilities separately from other liabilities’. business.gov.au says to calculate net assets by subtracting total liabilities from total assets.
Of the A$200,000 cash, A$50,000 is restricted. Eligible cash is A$150,000, and net borrowing is A$750,000 on this convention. AASB 107 asks entities to disclose significant cash balances that are ‘not available for use by the group’. Record the convention separately.
Compare the funding mixes
Half equity, half debt takes borrowings to equity from 1.88 to 1.09
| Measure | Case A | Case B |
|---|---|---|
| New debt | A$600,000 | A$300,000 |
| New equity | A$0 | A$300,000 |
| Assets after completion | A$2,600,000 | A$2,600,000 |
| Total liabilities | A$1,800,000 | A$1,500,000 |
| Borrowings | A$1,500,000 | A$1,200,000 |
| Equity | A$800,000 | A$1,100,000 |
| Borrowings to equity | 1.88 | 1.09 |
| Total liabilities to equity | 2.25 | 1.36 |
Sample A$600,000 asset purchase funded at completion. Pro forma balances before any trading, with the price equal to recorded asset value.
Illustrative figures, not client data.
Case B needs an equity decision as well as a lending one. Compare dilution, control and the funding available before you choose.
Neither ratio is a target or an approval. Business Queensland says ratio targets may differ depending on your business situation and industry. Get accounting advice on the actual transaction.
Test coverage and the cash plan
EBIT covers case B’s interest 4.0 times, and A$90,000 of cash stays free after the reserve
| Evidence | Filled value | Accountable role |
|---|---|---|
| Annual EBIT | A$300,000 | Finance |
| Annual interest and bank charges | A$75,000 | Finance |
| Interest coverage | 4.0 times | Finance |
| Transition cash reserve | A$60,000 | Operations |
| Eligible cash after the reserve | A$90,000 | Owner |
Sample. Coverage here is EBIT divided by annual interest and bank charges. Eligible cash is A$200,000 less A$50,000 restricted, less the A$60,000 reserve.
Illustrative figures, not client data.
Conventions differ, so state yours. BDC divides profit before interest and taxes by annual interest and bank charges. Business Queensland divides net profit by interest expenses. This sample uses the first. EBIT is ‘often called earnings before interest and tax, or EBIT’.
Coverage is not a repayment forecast. Keep the debt schedule and the operating cash plan as separate evidence. Operations shows when the reserve is needed. Sales supports the volumes behind earnings.
Record the commitment
The owner approves a funding mix but holds purchase authority until documents are signed
| Role | Evidence accepted | Decision |
|---|---|---|
| Finance | Ledger bridge and case B arithmetic | Accepted |
| Operations | A$60,000 transition cash plan | Accepted |
| Owner | A$300,000 of equity and case B | Funding mix approved, with conditions |
| Finance release | Funding documents not yet executed | Purchase authority withheld |
Illustrative figures, not client data.
An approved mix is not a purchase instruction. The release condition stops a provisional model becoming one.
This is general information only. Get accounting, financing and legal advice before signing, and reopen the paper if the price, the borrowing terms or the available cash change.
What to do first
Five steps keep a ratio from becoming a purchase instruction
- 01Agree the definition
Which liabilities count as debt, and how cash is treated, in writing.
- 02Reconcile to the ledger
Loan statements, the lease register and accrual schedules, matched line by line.
- 03Run each funding case
Show borrowings and total liabilities against equity for every mix.
- 04Test coverage and the cash plan
Interest cover, the reserve and the debt schedule, as separate evidence.
- 05Record sign-off and the release condition
Finance, operations and the owner, with purchase authority held until signing.
Start with the funding paper you already have.
Common questions
Does debt mean all liabilities?
Not always. Business Queensland’s debt to equity ratio uses total liabilities. A lender may count only borrowings, so agree the numerator in writing. The RBA calls it gearing.
Can cash reduce the debt figure?
A net debt measure subtracts cash, but only under an agreed definition. Record restricted cash and any reserve before you use it.
Is good interest coverage enough?
No. Coverage tests interest only. The RBA notes that lenders ‘are likely to place a high weight on the firms’ capacity to repay’, so principal repayments, the cash plan and the lender’s own terms are separate evidence.
Chartered Accountant (CA ANZ) and finance executive, based in Canberra. Practical AI and automation for SMEs, and adviser to owners, CEOs and boards on integration and finance.