Debt-to-Equity Ratio (D/E) is the metric help us visualize how capital has been raised to finance the operation of the company. D/E Ratio is generally used to evaluate a company’s financial health. A higher number will mean the company is highly leverage, and a lower number will mean the company is less leveraged. Another name for debt-to-equity ratio is risk ratio, or leverage ratio (“Gearing Ratio” for REITs).

Numbers to be considered in Debt-to-Equity Ratio are:

  • Short Term Debt
  • Long Term Debt
  • Fixed Payment Obligations
  • Total Liabilities
  • Total Shareholders’ Equities

Debt-to-Equity Ratio is a relatively good measurement on the risk the company is taking to continue operation.

HOW IS DEBT-TO-EQUITY RATIO CALCULATED?

The formula for Debt-to-Equity Ratio can be calculated by dividing the total shareholders’ equity by the total liabilities.

Debt-to-Equity Ratio = Total Liabilities/ Total Shareholders’ Equities

or

Debt-to-Equity Ratio = (Short term debt + Long term debt + Fixed payment obligations) / Shareholders’ Equity