How to Estimate the Interest Rate on Debt From a Balance Sheet and Income Statement

Interest rates on loans, even to the same entity, can vary. The length of the loan's term, who is lending the money and what the funds are meant to finance are all factors that influence what the interest rate is on the underlying loan. It is possible, though, to determine the average interest rate on a business's cumulative debt using the balance sheet and income statement.

Step 1

Determine the interest expense. Included on the income statement, interest expense represents the amount of money paid by the business to meet its interest requirements.

Step 2

Determine the amount of debt outstanding. Notes payable is included on the balance sheet in the liabilities section. This liability account represents the total amount a business owes based on any formal written promises it made to pay back certain amounts of money. Sometimes businesses break down this account into smaller segments or refer to it by a different name. Be sure to scan the entirety of the liability account for other accounts that might contain formalized, written debt measures that may need to be included. If you think other accounts on the liability side of the balance sheet contain formalized debt that charges interest, review the income statement's footnotes for the description of the account to determine if those account amounts should be included in outstanding debt.

Step 3

Divide interest expense by debt outstanding. This provides the average interest rate for the period. So if the interest expense is based on a quarterly financial statement, that is the average quarterly interest rate for the business; if you use an annual financial statement, this calculation provides the average annual interest rate. If you're calculating used quarterly statements and you wish to find the annual rate, multiply your result by 4.

Tip

Often, the business will provide more detailed analysis of interest expense in the footnotes of the financial statements. Check the footnotes to see if the information regarding interest expense for the business is included.

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