Debt to equity ratio diagram. This is one of the top business frameworks helping clients improve on their approach to strategy, project management, IT, HR, internal processes and client experience.The Debt to Equity ratio (also called the “debt-equity ratio”, “risk ratio”, or “gearing”), is a leverage ratio that calculates the weight of total debt and financial liabilities against total shareholders’ equity. Unlike the debt-assets ratio which uses total assets as a denominator, the D/E Ratio uses total equity.
Debt to Equity Ratio = (short term debt + long term debt + fixed payment obligations) / Shareholders’ Equity Debt to Equity Ratio in Practice If, as per the balance sheet, the total debt of a business is worth $50 million and the total equity is worth $120 million, then debt-to-equity is 0.42.
By rearranging the original accounting equation, we get Stockholders Equity = Assets – Liabilities. Unlike the debt-assets ratio which uses total assets as a denominator, the debt to equity ratio uses total equity. This ratio highlights how a company’s capital structure is tilted either toward debt or equity financing.