What is the Debt to Equity Ratio
Debt to equity ratio is a financial ratio that measures the number of dollars of borrowed funds for every dollar invested by investors. The debt to equity ratio reflects a company’s leverage by comparing total debt to total equity.
The debt to equity ratio (D/E ratio) reflects the mix of sources of financing for a company, the value of 1.0 when the company borrows an equal amount of equity. The higher the Debt to equity ratio, the more debt the company has and vice versa.
A high D/E ratio is often associated with risk, which means a company relies on debt to meet its financial growth. However, a low D/E ratio is not necessarily a positive sign, as a company may be too reliant on equity financing, which is more expensive than debt – and a reluctance to increase debt could cause the company to miss out on growth opportunities.
Investors use the debt to equity ratio to compare with the industry average and competitors., to get an idea of a company’s debt ratio.
Debt to Equity Ratio Formula
The debt to equity ratio can be calculated by dividing the total debt by the total equity, or the following formula:
D/E = Total debt / Total equity
For example, let’s say the Feriors company had the following financial results for last year:
- Total debt of $100
- Total equity of $500
D/E = 100 / 500 = 0.2 (or 20%)
This means the company borrowed 20 cents for every dollar invested by investors.
FAQs
Debt to equity ratio (D/E ratio) is a financial ratio that measures the number of dollars of borrowed funds for every dollar invested by investors.
The debt to equity ratio can be calculated by dividing the total debt by the total equity, or this following formula: D/E = Total debt / Total equity
A low debt to equity ratio reflects the lower level of debt the company has. However, a low D/E ratio is not necessarily a positive sign, as a company may be too reliant on equity financing
