A debt-to-equity ratio (Or D/E) is the ratio in finance that shows the relation of the size of a company’s outstanding debt in relation to a company’s market cap versus what the business owes after financing the purchase of assets, research and development, and product launches.
The debt to equity ratio is similar to leverage. This ratio measures the risk of a company’s debt load versus the value of the business itself. The two measurements used for this ratio come from the company’s balance sheet, market capitalization of outstanding shares, or book value. If a company’s bonds and stock are traded publicly they have set current prices that makes it easy to calculate quickly. For companies not publicly traded you need access to their private financial statements to calculate this ratio.
How to calculate the debt to equity ratio formula:
The ratio is simply debt divided by equity. What is considered as company debt can be different based on interpretation. The ratio can be calculated in a few different ways:
Debt / Equity
Long-term Debt / Equity
Total Liabilities / Equity
The total Debt / Equity is a measurement of total future obligations of a company divided by the total value of the company equity.
The debt to equity ratio is used in corporate finance to measure the magnitude of the debt load that a company has versus the company value. It quantifies and shows the potential of shareholder equity to pay off all company debts during a business downturn or bankruptcy.