3.1.4. Debt/Equity and Debt/Capital Ratios
The debt/equity (D/E) ratio, sometimes just called the debt ratio, compares the proportions of a company’s assets that are financed by borrowing versus shareholder investment. Average debt/equity ratios vary between industries and are usually highest in capital-intensive industries. A company that has a high D/E ratio for its industry is not necessarily in terrible financial shape, but may be vulnerable to fluctuations in interest rates, which would drive up its loan servicing costs. A high D/E ratio may also hamper a company’s ability to incur additional debt, which could cause liquidity problems.
To calculate the total debt/equity ratio, look to the figures on the balance sheet, and divide total debt by shareholders’ equity:
To express the ratio as a percentage, multiply by 100.
Accounts payable are typically deducted from total liabilities for purposes of determining the debt figure.
Example: A company with $135 million in total liabilities, including $5 million in accounts payable, and $100 million in shareholders’ equity