Debt-to-Equity Ratio

The Debt-to-Equity (D/E) ratio is a financial leverage ratio that compares a company’s total debt to its total equity. It gives both investors and creditors an understanding of how risky a company’s financing strategy is, and shows the proportion of financing that comes from creditors (in the form of debt) versus the one coming from owners (in the form of equity).

The formula to calculate the D/E ratio is:

Debt-to-Equity Ratio = Total Debt / Total Equity

– Total Debt: This includes all of a company’s liabilities, both current (due within one year) and long-term.
– Total Equity: This is what’s left over when you subtract total liabilities from total assets, essentially what is owned outright by the shareholders.

The higher the D/E ratio, the more the company is leveraged and potentially risky. However, what is considered a high or low D/E ratio can vary depending on the industry, as some industries tend to use more debt financing than others. A lower D/E ratio means a company has less leverage and is generally viewed as less risky, but it may also mean the company isn’t taking full advantage of the potential profits that financial leverage may bring.

Just like with other financial ratios, the D/E ratio is most useful when comparing companies within the same industry.