Business Literacy Institute Financial Intelligence

YouTube
LinkedIn
Facebook
  • Financial Concepts
  • What We Offer
    • Products & Services
    • Live Training
    • Online Financial Training
    • Financial Intelligence Books & Comics
      • Book Excerpts
      • Comic Excerpts
    • Training Topics
      • Income Statement
      • Balance Sheet
      • Cash Flow Statement
      • Cash versus Profit
      • Financial Ratios
      • Return on Investment (ROI)
      • Advanced Topics
    • Financial Intelligence Test
    • Project Management for Profit Training
    • Webinars
    • Money Maps
    • Keynotes
  • Harvard
  • Blog
  • About
    • BLI Team
    • Articles
    • Our Clients
    • Testimonials
    • Interviews
    • Contact
You are here: Home » Financial Concepts » Debt-to-Equity Ratio

Debt-to-Equity Ratio

Definition:

The debt-to-equity ratio is one of the leverage ratios. It lets you peer into how, and how extensively, a company uses debt. The debt-to-equity ratio is simple and straight forward with the numbers coming from the balance sheet. The debt-to-equity ratio tells us how much debt the company has for every dollar of shareholders’ equity. This ratio is a banker’s ratio. A bank will compare your debt-to-equity ratio to others in your industry to see if you are loan worthy. A high ratio here means you are high risk. A low ratio means that you might be at risk for a take over. What is considered high and low is very different based on the industry you compete in.

Some in the finance industry will just use interest bearing debt rather than total liabilities in this ratio.

Example:

Using the balance sheet, the debt-to-equity ratio is calculated by dividing total liabilities by shareholders’ equity:

Debt-to-Equity Ratio Formula

 

 

For example if a company’s total liabilities are $3,000 and its shareholders’ equity is $2,500, then the debt-to-equity ratio is 1.2. (Note: This ratio is not expressed in percentage terms.)

Debt-to-Equity Example

 

 

Book Excerpt:

(Excerpts from Financial Intelligence, Chapter 22 – Leverage Ratios)

What’s a good debt-to-equity ratio? As with most ratios, the answer depends on the industry. But many, many companies have a debt-to-equity ratio considerably larger than 1 – that is, they have more debt than equity. Since the interest on debt is deductible from a company’s taxable income, many companies use debt to finance at least a part of their business. In fact, companies with particularly low debt-to-equity ratios may be targets for a leveraged buyout, in which management or other investors use debt to buy up the stock.

Bankers love the debt-to-equity ratio. They use it to determine whether or not to offer a company a loan. They know from experience what a reasonable debt-to-equity ratio is for a company of a given size in a particular industry (and, of course, they check out profitability, cash flow, and other measures as well).

From the HBR Blog:

What is the debt-to-equity ratio?

“It’s a simple measure of how much debt you use to run your business,” explains [Joe] Knight. The ratio tells you, for every dollar you have of equity, how much debt you have. It’s one of a set of ratios called “leverage ratios” that “let you see how —and how extensively—a company uses debt,” he says.”  From A Refresher on Debt-to-Equity Ratio

 

Look up another Financial Concept:

A  B  C  D  E  F  G  H  I  L  M  N  O  P  Q  R  S  T  V  W 

Look up another Financial Concept:

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Enroll in Online Financial Training today, it’s only $99

Enroll in the Training Now!

Looking for training on the income statement, balance sheet, and statement of cash flows? At some point managers need to understand the statements and how you affect the numbers. Learn more about financial ratios and how they help you understand financial statements.

Our online training provides access to the premier financial statements training taught by Joe Knight. Learn finance in a fun and clear way that's easy and painless.

Find out more

Business Finance Training

Learn the basics of the financial statements and the story your numbers tell. BLI offers:

Live Training

Ask questions and participate in discussions as our trainers teach you how to read and understand your financial statements and financial position.

Online Training

Learn at your own pace and go through the financial statements and ratios. Take the quizzes to see how you learned.

Log in to your online training account

We wrote the book on Finance!

Financial Intelligence Books

Financial Intelligence takes you through all the financial statements and financial jargon giving you the confidence to understand what it all means and why it matters.

Do you understand finance? Take our test

Are you smarter than the average manager? Take our nationally validated test to see how much you really know. See how you compare to your boss and co-workers.

Contact BLI

E-mail: This email address is being protected from spambots. You need JavaScript enabled to view it.

Call: (818) 591-5955

Copyright © 2023 Business Literacy Institute · Log in to your online training account