Debt-to-Equity Ratio Calculator
Measure of financial leverage.
Formula first
Overview
The Debt-to-Equity ratio is a fundamental solvency metric used to measure the proportion of a company's financing that comes from debt compared to its own capital. It indicates how much a business relies on borrowed funds to fuel its operations and growth relative to the investment provided by shareholders.
Symbols
Variables
L = Total Liabilities, E = Total Equity, DE = D/E Ratio
Apply it well
When To Use
When to use: Analysts use this ratio when comparing the financial structure of firms within capital-intensive industries like utilities or manufacturing. It is particularly useful during credit evaluations or investment due diligence to assess a firm's long-term financial viability and risk profile.
Why it matters: A high ratio generally indicates that a company has been aggressive in financing its growth with debt, which can result in volatile earnings due to interest expenses. Conversely, a low ratio suggests a more conservative capital structure and a stronger cushion against business downturns.
Avoid these traps
Common Mistakes
- Using assets instead of equity.
One free problem
Practice Problem
A tech startup has total liabilities of 750,000 and total shareholder equity of 250,000. Calculate the debt-to-equity ratio for this company.
Solve for:
Hint: Divide the total amount of liabilities by the total amount of equity.
The full worked solution stays in the interactive walkthrough.
References
Sources
- Britannica: Debt-to-equity ratio
- Wikipedia: Debt-to-equity ratio
- Principles of Corporate Finance, 13th ed. by Brealey, Myers, and Allen
- Corporate Finance, 12th ed. by Ross, Westerfield, and Jaffe
- Financial Accounting, 15th ed. by Weygandt, Kimmel, and Kieso
- Ross, Westerfield, and Jaffe, Corporate Finance
- Brigham and Ehrhardt, Financial Management: Theory and Practice
- GCSE Finance / Business — Financial Ratios