Debt/Equity Ratio: Calculator, Example

Follow us on LinkedIn

We have already covered the debt/equity ratio formula in detail before. However, you should also know what it is and how to use it. In this article, we will discuss this ratio with the help of concrete examples.

What is the Debt/Equity Ratio?

The debt/equity ratio compares the different elements of a company’s capital structure. It shows you how much debt a company has compared to its equity finance. Essentially, it is a measure of financial leverage. The debt/equity ratio is a metric you can calculate using only the balance sheet.

The debt/equity ratio is a type of gearing ratio. It helps you determine whether a company has enough equity to cover its outstanding debts. For established companies, a high debt/equity ratio doesn’t matter. However, if a company suffers a business downturn, it can become critical.

Why do we use the Debt/Equity Ratio?

We use the debt/equity ratio to determine how much a company relies on debt for financing needs. On top of that, it also shows the contrast between debt and equity finance for that company. You can use the debt/equity ratio to avoid investing in companies with significant debt.

The debt/equity ratio is also vital when companies obtain finance from other sources. Usually, creditors consider this ratio before providing funds to a company. If this ratio is high, companies will face challenges when obtaining further finance for activities.

How to use the Debt/Equity Ratio?

You can calculate the debt/equity ratio for various companies on your own. Usually, all you need is the balance sheet for those companies. Once you have it, you can use the following debt/equity ratio formula to calculate this ratio.

Debt/Equity Ratio = Total Liabilities / Total Shareholders’ Equity

A low debt/equity ratio is the best for investments. However, you must know the industry average as well. On top of that, it is crucial to compare this ratio with other similar companies. On its own, the debt/equity ratio may not provide sufficient information.

Where to use the Debt/Equity Ratio?

We recommend using the debt/equity ratio when evaluating various companies for investments. More specifically, you should utilize this ratio to gauge the risks for a company. As stated above, the higher this ratio is, the higher your risks associated with the investment will be.

It is also better to use the debt/equity ratio comparatively. Several factors may determine how much this ratio will be for a company. However, if you compare it with the industry average or similar companies, you will get a better idea. The debt/equity ratio should be a part of your initial process to select investments.

Example

The debt/equity ratio is a balance sheet metric. You can also obtain it from other sources, such as Yahoo Finance. For that, you will need to search the company you are considering first.

Once you search the company, you can find its debt/equity ratio under the “Statistics” tab. There, this ratio appears under the “Balance Sheet” section. For example, the debt/equity ratio for Tesla at the time of this article on Yahoo Finance is as follows.

Debt to Equity Ratio

Please note that the debt/equity ratio on Yahoo Finance is for the most recent quarter (mrq).

Conclusion

The debt/equity ratio is a measure of financial leverage for a company. You can use this ratio to determine how much a company relies on debt for its operations. Similarly, it helps you gauge the risks associated with an investment.

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSThe 12 best Spanx Black Friday deals of 2023
The 12 best Spanx Black Friday deals of 2023

Spanx is hosting a Black Friday sale with discounts on their legendary shapewear, as well as deals on our favorite leggings and work pants.

Stay up-to-date with the latest news - click here
LATEST NEWSUkraine's new ATACMS shook Russia's attack helicopter fleet, but experts say Russian Ka-52 'Alligators' are still a threat to the front lines
Ukraine's new ATACMS shook Russia's attack helicopter fleet, but experts say Russian Ka-52 'Alligators' are still a threat to the front lines

The October 17 cluster missile strikes on two Russian airfields destroyed over a dozen helicopters, including several Ka-52s.

Stay up-to-date with the latest news - click here
LATEST NEWSUkrainian forces blew up a dance hall where an actress was performing for Russian troops: reports
Ukrainian forces blew up a dance hall where an actress was performing for Russian troops: reports

The Russian actress was killed in the strike along with 20 Russian soldiers, according to the BBC.

Stay up-to-date with the latest news - click here
LATEST NEWSTarget might limit you to just 10 items at self-checkout registers
Target might limit you to just 10 items at self-checkout registers

Target is experimenting with a 10-item limit at self-checkout kiosks at some stores as the retailer grapples with theft and other forms of product loss.

Stay up-to-date with the latest news - click here
LATEST NEWSAnalysis-Canada's EV charging strategy reaches fork in the road
Analysis-Canada's EV charging strategy reaches fork in the road
Stay up-to-date with the latest news - click here

Leave a Reply