The debt-to-equity (DE) ratio is a measure of a company’s leverage. Companies are financed through debt, equity, or some form of mezzanine financing.
Company’s with higher DE ratios are viewed as more risky. There is an expectation that capital from creditors (debt) must be repaid, while equity investors understand that their investment could go to zero and they will never receive a positive return on investment (ROI).
The Debt-to-Equity Ratio is also called the Gearing Ratio. The calculation is the following:
DE Ratio = Total Debt / Total Equity
Example Calculation
Company A’s balance sheet as of June 30, 2023, shows the following figures:
Total Assets: 56,500
Total Liabilities: 15,000
Common Stock: 1,000
Additional Paid in Capital (APIC): 50,000
Cumulative Retained Earnings: (9,500)
The company’s total equity is $41,500 (1,000 + 50,000 – 9,500)
0.36 = 15,000 / 41,500
Company A’s DE ratio is 0.36