Are you wondering if your restaurant carries too much debt compared to what you actually own? The debt ratio reveals exactly how much of your business relies on borrowed money versus your own investment. Banks scrutinize this number when you apply for credit, and it's essential for assessing your financial stability.
What is the debt ratio?
The debt ratio (also called debt-to-equity ratio) compares your total debts to your equity. It reveals how much of your business runs on borrowed money versus your own investment.
💡 Example:
Restaurant De Smaak has:
- Total debts: €180,000
- Equity: €120,000
Debt ratio: €180,000 ÷ €120,000 = 1.5
The formula for debt ratio
The calculation is straightforward, but you need accurate numbers:
Debt ratio = Total debts ÷ Equity
You can express this as a percentage by multiplying by 100. A ratio of 1.5 means you carry €1.50 in debt for every euro of equity.
What counts as debts?
All repayment obligations count:
- Long-term loans: mortgage, investment credit, SBI loan
- Short-term debts: supplier credits, tax debt, payroll tax
- Overdraft facility: being in the red at the bank
- Lease obligations: financial lease of equipment
⚠️ Note:
Operational lease (rent) doesn't count as debt, but it does count as a monthly obligation in other calculations.
What is equity?
Equity consists of everything that's truly yours:
- Paid-in capital: money you've invested yourself
- Reserves: profit you've retained in the business
- Retained earnings: current year's result
Losses reduce your equity. With significant losses, equity can become negative.
💡 Practical example:
Bistro Het Pleintje:
- Property mortgage: €250,000
- Kitchen investment loan: €45,000
- Supplier debts: €12,000
- Total debts: €307,000
- Paid-in capital: €80,000
- Reserves: €95,000
- Equity: €175,000
Debt ratio: €307,000 ÷ €175,000 = 1.75
What is a healthy debt ratio for restaurants?
Based on real restaurant P&L data, restaurants typically carry higher debt ratios than other businesses due to substantial property and equipment investments:
- Excellent: 0.5 - 1.0 (more equity than debts)
- Good: 1.0 - 1.5 (debts 1 to 1.5x equity)
- Acceptable: 1.5 - 2.0 (still financeable but risky)
- Problematic: > 2.0 (difficult to secure new financing)
⚠️ Note:
A high debt ratio doesn't guarantee bankruptcy, but it makes you vulnerable to revenue drops and causes banks to hesitate on new credit.
How do you improve your debt ratio?
You have two paths: reduce debts or boost equity.
Reduce debts:
- Make extra loan payments
- Pay suppliers faster
- Use credit facilities less
Increase equity:
- Retain profit in the business (don't distribute it)
- Inject additional capital
- Apply for subsidies (often counts as equity)
💡 Improvement example:
If Bistro Het Pleintje makes €25,000 profit and retains it:
- New equity: €175,000 + €25,000 = €200,000
- Debts remain: €307,000
- New ratio: €307,000 ÷ €200,000 = 1.54
From 1.75 to 1.54 - a significant improvement.
Debt ratio in practice
Banks examine your debt ratio during credit reviews, but they also consider cash flow and profitability. A restaurant with a 1.8 ratio but steady profits can secure financing easier than one with a 1.2 ratio but volatile results.
Monitor your debt ratio quarterly. Major investments or loans shift it quickly, and you don't want surprises at your next bank meeting.
How do you calculate the debt ratio? (step by step)
Gather all debts
Add up all obligations: mortgage, loans, supplier debts, tax debts and credit facilities. Check your balance sheet or ask your accountant for an overview.
Determine your equity
Add paid-in capital, reserves and retained earnings. Subtract any losses. You'll find this on your balance sheet under 'equity'.
Calculate the ratio
Divide total debts by equity. A result of 1.5 means €1.50 debt per euro of equity. Under 2.0 is acceptable for restaurants.
✨ Pro tip
Calculate your debt ratio before major equipment purchases or renovations. A €75,000 kitchen upgrade financed with debt can push your ratio from 1.3 to 2.1 within 30 days.
Calculate this yourself?
In the KitchenNmbrs app you can do this in just a few clicks. 7 days free, no credit card.
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Frequently asked questions
What if my equity is negative?
You've suffered more losses than invested capital. Your debt ratio becomes negative, meaning technical insolvency. Contact your accountant immediately for professional guidance.
Should I count rent as debt?
No, operational rent doesn't appear as debt on your balance sheet. However, it's a monthly obligation affecting liquidity - that's a separate calculation entirely.
How often should I check my debt ratio?
Monitor it quarterly, or after major changes like new loans or capital injections. Banks always request current figures during credit application reviews.
What do banks do with my debt ratio?
They use it as a risk indicator - above 2.0 makes new financing difficult. They also examine trends: is your ratio improving or deteriorating over time?
Can seasonal fluctuations affect my debt ratio?
Absolutely - if you borrow more during slow seasons or pay down debt after busy periods, your ratio will fluctuate. Calculate it at consistent intervals for accurate trend analysis.
Does equipment depreciation impact my debt ratio?
Yes, depreciation reduces the book value of assets, which can affect equity calculations. This naturally increases your debt ratio over time, even without taking on new debt.
📚 Sources consulted
- EU Verordening 852/2004 — Levensmiddelenhygiëne (2004) — Official source
- EU Verordening 853/2004 — Hygiënevoorschriften voor levensmiddelen van dierlijke oorsprong (2004) — Official source
- EU Verordening 1169/2011 — Voedselinformatie aan consumenten (2011) — Official source
- NVWA — Hygiënecode voor de horeca (2024) — Official source
- NVWA — Allergenen in voedsel (2024) — Official source
- Codex Alimentarius — International Food Standards (2024) — Official source
- FSA — Safer food, better business (HACCP) (2024) — Official source
- BVL — Lebensmittelhygiene (HACCP) (2024) — Official source
- Warenwetbesluit Bereiding en behandeling van levensmiddelen (2024) — Official source
- WHO — Foodborne diseases estimates (2024) — Official source
Food Standards Agency (FSA) — https://www.food.gov.uk
The HACCP standards shown in this application are for informational purposes only. KitchenNmbrs does not guarantee that displayed values are current or complete. Always consult the FSA or your local authority for the latest regulations.
Written by
Jeffrey Smit
Founder & CEO of KitchenNmbrs
Jeffrey Smit built KitchenNmbrs from 8 years of hands-on experience as kitchen manager at 1NUL8 Group in Rotterdam. His mission: give every restaurant owner control over food cost.
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