Enterprising Investor Forum

Debt to Equity Ratio Tuesday, July 3, 2007

This ratio helps us measure a company’s financial leverage. It shows us what portion of the equity and debt the company is using to finance its assets.

The debt to Equity ratio is calculated by dividing Total Liabilities* by Total Equity.

A ratio that is higher than “1″ indicates that the company’s assets are mainly financed with debt, whereas a ratio of less than “1″ indicates that the company’s assets are primarily supplied by equity. Generally speaking, the more leverage the company has, the higher the ratio and the more aggressive the company has been in financing its growth with debt.

*Please note that sometimes the ratio is calculated only using interest-bearing, long-term debt instead of Total Liabilities.