Debt Equity Ratio

Debt to Equity Ratio

Debt to Equity Ratio is a good indicator for any company’s performance. An Investor should understand this very basic terminology before investing in any Stock.

Debt Equity Ratio Definition: -

Debt to Equity Ratio means a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Debt Equity Ratio Formula: -

Debt Equity Ratio = Total Liabilities Divided by Shareholders Equity.

Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation.
Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial statements as well as companies'.

Debt Equity Ratio Calculation: -

You can calculate Debt Equity Ratio by Dividing Total liabilities of the company by it’s equity.

Debt Equity Ratio Explanation in Simple Language: -

High Debt/Equity ratio means the company has more debt than assets. Which is sometimes not good. Because of company fails to repay that debt, it may go bankrupt. If Liabilities are equal to Shareholders’ Equity than the ratio will be 1. If Liabilities are more than shareholders equity than the ratio will be more than 1 and if liabilities are less than equity than the ratio will be less than 1.

If the ratio is less than 1 than it’s a good thing. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing.

Debt Equity Ratio Industry Average: -

The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5.