How to Calculate Debt Equity

Equity, also known as shareholder's equity, is the book value of a company. It is calculated using the total assets and total liabilities of the company. It is composed of the initial capital from investors plus any money the company has retained. Debt can refer to either the total liabilities of a company or just the interest bearing debt of the company. Debt Equity is a ratio used to measure how strong a company is financially; the smaller the ratio the better.

Instructions

1. Subtract the company's total liabilities from its total assets to get the stockholders equity. Use a company with $2,000 in total liabilities and $10,000 in assets as an example. Its stockholders equity is $10,000 - $2,000 = $8,000.

2. Divide the total liabilities by the stockholders equity to get the debt equity ratio. The debt equity ratio of the example company is $2,000 / $8,000 = 0.25. Continue to the next step for the alternate calculation using only interest bearing debt.

3. Divide the company's interest bearing debt by the stockholders equity to get the alternate version of the debt equity ratio. Assuming the example company's interest bearing debt is $1,000 then $1,000 / $8,000 = 0.125 is the debt equity ratio.

Tips & Warnings

• The debt equity ratio can also be used for personal finance.

References

• Investopedia