debt-to-equity ratio

Also found in: Wikipedia.

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.

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.

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.

References in periodicals archive ?
Overall during fiscal 2006, the 30 agencies demonstrated a slight decline in capital base positions, with the median debt-to-equity ratio increasing to 5.
The collective debt-to-equity ratio of non-financial companies in the United States is estimated at 80 percent.
The company expects the debt-to-equity ratio to remain in the range of 8 to 9 times (x).
AHFC's leverage ratios are among the lowest of all housing finance agencies with the Fitch adjusted debt-to-equity ratio at 1.
Ames' debt-to-equity ratio in the most recent quarter is 152.
If the grandfather clause is removed, paired-share REITs will be forced to consider adopting a different structure, which will allow them to continue to compete and to grow, and likely would be more highly leveraged and have a greater debt-to-equity ratio in order to reduce taxable income.
Historically, CNA has maintained modest financial leverage at the parent holding company level, with a debt-to-equity ratio of 17% at year-end 1993; Continental has maintained more aggressive financial leverage at its holding company, with a debt-to-equity ratio of 34% at year-end 1993.
The earnings stripping rules generally apply to a corporation with a debt-to-equity ratio in excess of 1.
Affected companies have (1) "excess interest expense" (net interest expense over 50% of cash flow) and (2) a debt-to-equity ratio of greater than 1.
The GO rating is based on favorable overall financial and portfolio performances, adequate levels of liquidity and excess reserves, a moderate debt-to-equity ratio when compared with other state housing finance agencies, and management's expertise in carrying out the association's public purpose mandate while protecting its long-term credit quality.
The collective debt-to-equity ratio of nonfinancial companies is estimated at 80 percent.
In addition, the study showed that the average debt-to-equity ratio for the "most recently" completed transactions was 75 percent.