What it means
Debt comes in two broad flavours. Secured debt is tied to collateral, giving the lender first claim on named assets, while unsecured debt relies only on the borrower's promise and general creditworthiness.
The secured debt to equity ratio divides the first category by total shareholders' equity. This matters because secured lenders sit at the front of the queue if a business fails.
A company with a modest total debt to equity ratio can still be fragile if almost all of that debt is secured against its productive assets, since there is little left to pledge and unsecured creditors would recover very little. The calculation takes all secured borrowings, including mortgages, asset finance, hire purchase and any facility carrying a fixed or floating charge over company assets, and divides by equity.
Equity is total assets minus total liabilities, sometimes called net assets or book value. The most practical use of the ratio is in covenant management.
Lenders frequently cap secured borrowing at a stated multiple of equity, and tracking headroom against that cap tells a finance team exactly how much further asset backed borrowing is available before consent is required. The main nuance is that the ratio uses book values, and book value can be far from market value.
A warehouse carried at cost less depreciation might be worth twice its book figure, which makes the ratio look worse than the lender's actual position, so serious analysis pairs the ratio with a current valuation of the pledged assets.
In practice
Real-world examples.
Example
A haulage company with a fleet financed entirely on hire purchase shows a secured debt to equity ratio of 1.8. When it approaches a bank for a working capital facility, the bank offers only an unsecured overdraft at a higher rate because every vehicle is already pledged.
Example
A property investor deliberately runs a secured ratio of 1.2 because rental income is contractual and predictable. Its lender accepts the level given long leases to strong tenants, whereas the same ratio in a cyclical manufacturer would trigger far tighter conditions.
Example
A private company preparing for sale reduces its secured ratio from 0.9 to 0.4 over two years by repaying equipment finance from retained profit. The buyer's due diligence team notes the unencumbered asset base and it becomes a supporting argument for a higher price.
Think of it
“Secured debt to equity shows how much of your borrowing is backed by pledged assets.
Formula
Calculation
Secured debt to equity ratio = total secured debt / total shareholders' equity.
A regional food producer has a mortgage of $3,000,000 on its factory and equipment finance of $1,500,000, giving total secured debt of $3,000,000 + $1,500,000 = $4,500,000. It also has an unsecured supplier loan and overdraft totalling $2,000,000. Shareholders' equity stands at $9,000,000.
The secured debt to equity ratio = $4,500,000 / $9,000,000 = 0.50. For comparison, the total debt to equity ratio = ($4,500,000 + $2,000,000) / $9,000,000 = $6,500,000 / $9,000,000 = 0.72.
If the company's banking agreement caps secured borrowing at 0.75 times equity, the maximum permitted is 0.75 x $9,000,000 = $6,750,000, leaving headroom of $6,750,000 - $4,500,000 = $2,250,000. That figure sets a hard ceiling on any asset backed funding for the next expansion, unless equity grows through retained profit or a new share issue.Case study
Seen in the real world.
This is an illustrative and fictional scenario. Coldharbour Provisions, an invented regional food producer, carried $4,500,000 of secured debt against $9,000,000 of equity, a ratio of 0.50, and considered itself conservatively financed. Its banking covenant allowed secured borrowing up to 0.75 times equity.
The fictional board then approved a $3,000,000 automated packing line, assuming asset finance would cover it. The finance team calculated the headroom and found only $2,250,000 available, since 0.75 x $9,000,000 = $6,750,000 against existing secured debt of $4,500,000. Proceeding as planned would have breached the covenant on the day the equipment was delivered.
Coldharbour split the funding instead, taking $2,000,000 of asset finance and $1,000,000 from a shareholder subscription that also increased equity and therefore the covenant ceiling. The illustration shows why the ratio deserves checking before capital commitments are made rather than after.
Watch out
Common mistakes.
- Lumping secured and unsecured borrowing together, which hides how much of the asset base is already pledged to lenders.
- Forgetting that operating leases and hire purchase arrangements often carry security over the underlying assets and belong in the secured total.
- Comparing the ratio against a general benchmark without adjusting for sector, since asset heavy businesses such as property and transport naturally carry far higher secured borrowing.
Questions
People also ask.
Why separate secured debt from total debt?
Because secured lenders have first claim on named assets in an insolvency, so the split tells you how much genuine cover remains for everyone else.
What is considered a high secured debt to equity ratio?
Above roughly 1.0 is high for most trading businesses, though asset backed sectors such as property routinely operate well above that with lender agreement.
How can a company lower the ratio without repaying debt?
By increasing equity, either through retained profit or a share issue, since the ratio falls as the denominator grows.
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