Debt To Equity (Total)
Updated on March 2, 2023
Debt-to-equity (D/E) ratio is used to evaluate a company’s financial health and is calculated by dividing its total liabilities by the shareholder equity. D/E ratio is an important metric and a measure of the extent to which a company is financing its operations using debt rather than its own resources.
D/E Ratio Calculation
Debt/Equity Ratio = Total Liabilities/Total Shareholders’ Equity
Shareholders Equity = Total Assets – Total Liabilities
A company’s Balance Sheet gives the required information for D/E calculation.
D/E Ratio Explained
A high D/E ratio is associated with high investment risk as it is an indication that the company relies primarily on debt financing.
There are different views on an ideal D/E ratio level, but in general, a D/E ratio of 2 is seen as optimum, which means that there is one equity asset for every 2 debt assets.This is however, dependent on the type of industry and D/E ratio can reach 5 or even 8 and is based on factors like growth, competition and the company’s profitability.