Debt-to-Equity Ratio

Debt/Equity Ratio

In risk analysis, a way to determine a company's leverage. The ratio is calculated by taking the company's long-term debt and dividing it by the value of its common stock. Put graphically:

Debt/equity ratio = Long-term debt / Common stock

The greater a company's leverage, the higher the ratio. Generally, companies with higher ratios are thought to be more risky because they have more liabilities and less equity. See also: Long-Term Debt/Capitalization Ratio.

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debt-to-equity ratio

The relationship between long-term funds provided by creditors and funds provided by owners. A firm's debt-to-equity ratio is calculated by dividing long-term debt by owners' equity. Both items are shown on the balance sheet. A high debt-to-equity ratio, which indicates very aggressive financing or a history of large losses, results in very volatile earnings. A low debt-to-equity ratio, which indicates conservative financing and low risk, results in fewer possibilities of large losses or large gains in earnings.

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Debt-to-equity ratio. A company's debt-to-equity ratio indicates the extent to which the company is leveraged, or financed by credit. A higher ratio is a sign of greater leverage.

You find a company's debt-to-equity ratio by dividing its total long-term debt by its total assets minus its total debt. You can find these figures in the company's income statement, which is provided in its annual report.

Average ratios vary significantly from one industry to another, so what is high for one company may be normal for another company in a different industry.

>From an investor's perspective, the higher the ratio, the greater the risk you take in investing in the company. But your potential return may be greater as well if the company uses the debt to expand its sales and earnings.