How to Calculate Return on Debt

Return on debt is a measure of a company's performance based on the amount of debt it has issued or borrowed. Specifically, it can be computed as the amount of profit generated from each dollar of debt in which the company has both issued (bonds) and taken on (loans). Unlike return on equity, where one line item represents the equity stake in the company, long-term debt can be in several forms and at different rates of interest depending on the issue or creditor.

Step 1

Look up the long-term debt for the company. Long-term debt can be found on the balance sheet or in the notes to the financial statements in the 10K or 10Q. The section will explain how much debt is taken out or issued and the number of years associated with each.

Step 2

Look up the net income. Net income is usually the last line item on the income statement located in the 10K, 10Q or annual report. Specifically, you want net income after tax.

Step 3

Divide net income by long-term debt. Let's work through an example. If a company has net income of $10,000 and long-term debt (due over 1 year) of $100,000, then the return on debt = $10,000/$100,000 = .1 or 10 percent.

references