Debt to Equity Ratio

Knowledge Center


Measuring Solvency and Capital Structure. Explanation of Debt to Equity Ratio.



The Debt to Equity Ratio is used for Measuring Solvency and researching the Capital Structure of a company. It indicates how much the company is leveraged (in debt) by comparing what is owed to what is owned. In other words it measures a company's ability to borrow and repay money.

Usage of the Debt to Equity Ratio by creditors and investors

The Debt to Equity Ratio is closely watched by creditors and investors, because it reveals the extent to which company management is willing to fund its operations with debt, rather than using equity.


For investors, a high Debt / Equity ratio or a higher one than the company's peers means:

  • Higher debt burden
  • Higher interest charges
  • Lower, uncertain earnings

Lenders such as banks are particularly sensitive about this ratio, since an excessively high ratio of debt to equity will put their loans at risk of not being repaid.


Possible actions by banks to counteract this problem are the use of restrictive contracts that force to use excess cash flow for debt repayment. Restrictions on alternative use of cash are also quite common, as well as a requirement for investors to put more equity into the company themselves.

Debt to Equity Ratio calculation

The Debt to Equity Ratio formula is fairly simple:

Divide Total Debt (= Total Liabilities) by Total Equity. Can be multiplied with 100 to get a percentage.

Note that the Debt figure should include all operating and capital lease payments.

Sometimes only long-term debt is taken into account in the numerator to look at the long term Debt to Equity capital structure.

Debt to Equity ratio benchmarking

Comparing the result with other companies in the same industry may prove useful. It is recommended to use the Debt to Equity Ratio over a period of several years and additionally take into account WHEN certain repayments are due as this can make a major difference for the solvency of the company.

Debt to Equity Ratio Special Interest Group

Special Interest Group (25 members)

Debt to Equity Ratio Forum  

Recent topics

  Calculating Financial Gearing
Hello there. I need some help on how to calculate financial gearing by using debenture market price and how to find or calculate the market price. I k...
  Excluding IC Liability from Total Debt
Should the total debt in the debt to equity ratio exclude IC liability?...

Best Practices - Debt to Equity Ratio

Expert Tips - Debt to Equity Ratio

Advance yourself in business administration and management

Resources - Debt to Equity Ratio

Sources and Methods of Financing a Start-up Company or Small Business


Capital Structure


Introduction and Calculation of WACC and its Components


Solvency Tests


3 Minute Introduction to Financial Ratio Analysis: Why do it and What are the Main Types?


Capital Structure


Debt to Equity Ratio Diagram


News about Debt Ratio


News about Measuring Solvency


Videos about Debt Ratio


Videos about Measuring Solvency


Presentations about Debt Ratio


Presentations about Measuring Solvency


Books about Debt Ratio


Books about Measuring Solvency


More about Debt Ratio


More about Measuring Solvency


Accelerate your management career

Compare with Debt to Equity Ratio:  Cash Flow from Operations  |  Dividend Payout Ratio  |  Benchmarking

Return to Management Hub: Finance & Investing

More Management Methods, Models and Theory

Special Interest Group Leader


About 12manage | Advertising | Link to us / Cite us | Privacy | Suggestions | Terms of Service
© 2018 12manage - The Executive Fast Track. V15.0 - Last updated: 13-11-2018. All names ™ of their owners.