Debt to Equity Ratio

Debt to Equity Overview

When we talk about the debt to equity ratio, we’re referring to a financial metric that compares the total debt of a company to its shareholder equity. It’s an important tool for us as investors to assess a firm’s financial health.

Essentially, this ratio tells us how much creditors have funded the company versus what the shareholders have committed.

Calculating the debt-to-equity ratio is straightforward: we divide a company’s total liabilities by its total shareholder equity. You’ll often see it represented like this:

Debt-to-Equity Ratio = Total Debt / Shareholder’s Equity

Component	Formula
Total Debt	Total Liabilities
Total Equity	Shareholder Equity
Debt to Equity Ratio	Total Debt / Total Equity

The resulting figure can give us insights into the company’s financial leverage—how much of the company is financed by debt versus equity.

A higher ratio suggests that a company might be riskier, as it relies more on debt to fund its operations. On the flip side, a lower ratio indicates less reliance on borrowing, which might imply a more stable financial stance.

Keep in mind that the ‘healthy’ level of debt to equity ratio varies by industry. We should consider industry benchmarks when analyzing a company’s ratio to make well-informed investment decisions.

We use this metric, among others, to gauge a company’s financial resilience and potential for long-term growth.