Debit to Equity Ratios

Accountants and investors use debt to equity ratio.

Debt to equity ratio provides a general understanding of the way a company conducts its capital distribution. Capital distribution is how a company finances its operations.

Uses

Debt to equity shows the amount of debt a company has-its liabilities-compared to its shareholders equity. If the number is greater than one, then the company finances more through debt. If the number is less than one, then the company finances more through equity.

Formula

The formula for debt to equity equals total liabilities divided by shareholders' equity.

Total Liabilities

A company will disclose its total liabilities on its balance sheet. Total liabilities is the amount the company owes other entities.

Total Shareholders' Equity

A company will disclose its total shareholders' equity on the balance sheet. This is the amount of capital a company has from equity.

Example

A company has $100 in liabilities and $70 in shareholders' equity. Therefore, $100 divided by $70 equals 1.42857143. Since the ratio is above 1, the company finances more through debt than equity.

References

• Investopedia: Debt/Equity Ratio
• Investopedia: Debt Ratios - Debt-Equity Ratio