Enter the annual net income ($) and the average long-term debt ($) into the Return on Debt Calculator. The calculator will evaluate and display the Return on Debt. 

Return on Debt Formula

The following formula is used to calculate the Return on Debt. 

ROD = ANI / ALD * 100
  • Where ROD is the Return on Debt (%)
  • ANI is the annual net income ($) 
  • ALD is the average long-term debt ($) 

To calculate the return on debt, divide the annual net income by the average long-term debt, then multiply by 100.

How to Calculate Return on Debt?

The following example problems outline how to calculate Return on Debt.

Example Problem #1:

  1. First, determine the annual net income ($).
    • The annual net income ($) is given as: 50,000.
  2. Next, determine the average long-term debt ($).
    • The average long-term debt ($) is provided as: 375,000.
  3. Finally, calculate the Return on Debt using the equation above: 

ROD = ANI / ALD * 100

The values given above are inserted into the equation below and the solution is calculated:

ROD = 50,000 / 375,000 * 100 = 13.33 (%)


FAQ

What is the significance of calculating Return on Debt (ROD)?
Calculating Return on Debt helps businesses and investors understand the efficiency with which a company is using its debt to generate net income. It’s a measure of financial performance that indicates how well a company can turn its debt into profits, which is crucial for assessing the financial health and operational efficiency of a business.

Can Return on Debt be negative, and what does it signify?
Yes, Return on Debt can be negative if a company has a negative annual net income, meaning it is operating at a loss. A negative ROD indicates that the company is not generating enough income to cover its debts, which could be a red flag for investors and creditors about the company’s financial stability and risk level.

How does Return on Debt compare to other financial metrics like ROI or ROE?
Return on Debt (ROD) specifically measures the efficiency of a company’s debt usage in generating profits. In contrast, Return on Investment (ROI) measures the overall efficiency of an investment in generating profits, and Return on Equity (ROE) measures the profitability of a company from the shareholders’ perspective. Each metric provides insights into different aspects of financial performance, with ROD focusing on debt management, ROI on investment returns, and ROE on equity efficiency.