What Is the Debt-to-Equity Ratio & How Is It Calculated? | Titan (2024)

  • Smart Cash
  • Performance
  • Log in
  • Loading...Get Started

Table of Contents

Debt-to-Equity Ratio Formula

Interpreting debt-to-equity ratio results

Example of debt-to-equity ratio

What is a good debt-to-equity ratio?

What does it mean to have a negative debt-to-equity ratio?

Why is debt to equity ratio important?

Learn

Stock Analysis

What Is the Debt-to-Equity Ratio?

Aug 25, 2022

·

6 min read

The debt-to-equity ratio reveals the amount of debt, or liabilities, a company carries in relation to how much shareholder equity it has.

What Is the Debt-to-Equity Ratio & How Is It Calculated? | Titan (1)

Wondering what a debt-to-equity ratio is? In broad terms, this measurement is a key indicator of financial flexibility and strength, showing a company’s ability to cover expenses and operating costs, and weather setbacks.

In short, a D/E ratio reveals the amount of debt—or liabilities—a company carries in relation to how much shareholder equity it has. Shareholder equity simply means how much in assets the owners would have after their debt has been paid off.

If a company has a high debt-to-equity ratio, it is considered highly leveraged. This often means it has borrowed from lenders or sold bonds, and has used the capital to purchase assets. These assets are bought with the intention of increasing profits and earning more than enough to repay the borrowed money.

If you're an investor, looking at a company's D/E ratio can help you determine a company's ability to repay its debt. It also indicates how much equity an investor might receive if the company were sold or liquidated. Although there are advantages and disadvantages to both tapping into debt or tapping into equity to run a business, typically, for the investor, lower D/E ratios suggest greater financial soundness.

Debt-to-Equity Ratio Formula

The debt-to-equity ratio formula is fairly simple:

Total liabilities / total shareholder's equity = debt-to-equity

This ratio is typically expressed in numerical form, such as 0.6, 1.2, or 2.0.

Total debt includes short-term and long-term liabilities. Short-term liabilities are debt that typically are paid off within a year—think rent, income taxes, and accounts payables. Long-term liabilities include any debt that is paid off in more than a year, typically things such as larger bank loans and bonds.

If you use Excel sheets frequently for your business, you can easily punch in a formula to calculate a D/E ratio:

  1. Pop in the total debt and shareholder equity from the company’s balance sheet.
  1. Put these numbers side-by-side in two cells on a spreadsheet.
  1. Last, in the cell to the left of these two cells, put X/Y to get the D/E ratio.

For example:

Total debt: Cell D24

Shareholder equity: Cell D25

D/E Ratio (in Cell D23): D24/D25

Interpreting debt-to-equity ratio results

When a business has a D/E ratio that exceeds 1.0, it means that the company has more debt than assets. On the flip side, a D/E ratio of less than 1.0 shows a company's assets are greater than its debt load.

It's important to keep in mind that the D/E ratio has some limitations. For one, a business's leverage might be skewed by including or excluding preferred stock, contributions to retirement accounts, and so-called intangible assets. In turn, the ratio might not paint a complete or accurate picture of how much debt a company is actually carrying.

Sometimes, the calculations can feel like comparing apples to oranges; accounts in one company's balance sheet might look different or include different categories or transactions than another company's. In that case, adjustments might be made to the D/E ratios of different companies so they're more comparable.

Then there is the argument that leverage isn't enough to determine how risky a company might be for the investor. That's because leverage doesn't take into account low interest rates, which tend to make it less costly to borrow and repay debt.

At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.

Loading...Get Started

Example of debt-to-equity ratio

A debt-to-equity ratio of 1.0 means that for every dollar of equity a company has, it uses $1 of debt to run the business. A debt-to-equity ratio of 2.0 means that for every $1 of equity a company has, it taps into $2 of financing. A debt-to-equity ratio of 0.75 equates to 75 cents borrowed for every $1 of equity.

Jennifer is an angel investor who has narrowed down to two the number of immersive art venues she wants to invest in. She takes a gander at the balance sheets of Snail Mail Art Unlimited and Pop Color Infusion. Snail Mail Art Unlimited has $40,000 in debt and $80,000 in assets—its D/E ratio is 0.50. Pop Color Infusion has $50,000 in debt and $50,000 in assets, which equates to a D/E ratio of 1.

Looking closely at Snail Mail Art Unlimited, Jennifer sees that it recently took out a loan to open a new venue, which could mean greater profitability in a few years. Meanwhile, Pop Color Infusion recently took out a bank loan because it needed the financing to cover outstanding invoices from vendors. While Snail Mail Art has long-term debt, Pop Color Infusion is carrying short-term debt. Although Pop Color's D/E ratio might change in the near future after it repays the loan, Snail Mail's D/E ratio might remain high for a while. That's because it might be years before it pays back the loan.

What is a good debt-to-equity ratio?

Defining a good debt-to-equity ratio is tricky because industry norms vary wildly. Plus, companies within the same industry, depending on their size, goods and services offered, and other variables could also lead to a different D/E ratio. However, across the board, if a company has a D/E ratio higher than 2.0, it’s a warning sign, regardless of industry.

Industries that require heavy capital investment tend to have higher D/E ratios than companies that sell services. For example, railroads and airlines spend a lot on materials and equipment, relying on borrowing that oftens leads to high D/E ratios. Amusement and entertainment companies, by comparison, tend to be less heavily indebted and have lower D/E readings.

If a debt-to-equity ratio is too high or too low, it could be problematic. An excessive D/E ratio might indicate that a company could have a hard time repaying its debt if profits dwindle. Or should the company be in financial straits and file for bankruptcy, it could have a tough time landing traditional financing, which it relied on in the past to run and grow the business.

However, a low D/E ratio could indicate that a business relies too heavily on its own assets. Used properly, debt is a powerful tool to help a company grow faster than it otherwise might by relying on internal capital. There's a bit of a happy medium when it comes to how much debt a company should shoulder.

What does it mean to have a negative debt-to-equity ratio?

It is possible for a company to have a negative debt-to-equity ratio. A negative D/E ratio means a company has more debt than assets. This could mean that the net worth of a company is less than zero. It could also mean that the interest of a loan used to make an investment is greater than any profits gained from the investment. This can serve as a smoke signal, warning investors and lenders that a company may be on shaky ground.

Why is debt to equity ratio important?

As an investor, a debt-to-equity ratio is important when figuring out which companies are shouldering more debt to finance and expanding their operations. Although there are pros and cons to using more debt or more equity, typically a lower D/E ratio means a company can pay its obligations more easily and keep the lights on should profits tumble. In turn, it could pose less of a risk to an investor. But a company with a low D/E also might not grow as fast.

There are nuances to a company's D/E ratio that should be taken into account. And a D/E ratio shouldn't be the only thing investors look at to determine a company’s risk. Ideally, investors should take a broad approach and evaluate all available financial data.

Disclosures

Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.

You might also like

What Is Fundamental Analysis?Fundamental analysis is a method of attempting to determine the intrinsic value of a stock, using publicly available financial information.Read MoreWhat Is Market Cap?It’s used for comparing and ranking companies by size, and for benchmarking the stock returns of a company against an index of comparable companies based on market cap.Read MoreWhat Is Return on Equity (ROE)?ROE tells investors if a company is making good use of their money to generate earnings, particularly when compared to its competitors and the rest of the industry.Read More

Cash Management

Smart CashSmart Cash FAQsCash OptionsGet Smart Cash

Invest

Managed InvestingManaged StocksAutomated StocksAutomated BondsCryptoCreditVenture CapitalReal EstateLong-Term InvestingRetirementAll Strategies

Learn

ArticlesNewslettersHistorical PerformanceWealth CalculatorSmart Cash CalculatorHelp Center

Company

PricingAbout UsCareersLegalPrivacy

Terms

© Copyright 2024 Titan Global Capital Management USA LLC. All Rights Reserved.

Titan Global Capital Management USA LLC ("Titan") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). By using this website, you accept and agree to Titan’s Terms of Use and Privacy Policy. Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities or investment products. Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Account holdings and other information provided are for illustrative purposes only and are not to be considered investment recommendations. The content on this website is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services.

Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.

Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.

The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.

Cryptocurrency advisory services are provided by Titan.

Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.

Contact Titan at support@titan.com. 508 LaGuardia Place NY, NY 10012.

What Is the Debt-to-Equity Ratio & How Is It Calculated? | Titan (2024)

FAQs

What Is the Debt-to-Equity Ratio & How Is It Calculated? | Titan? ›

The formula for calculating the debt-to-equity ratio is to take a company's total liabilities and divide them by its total shareholders' equity. A good debt-to-equity ratio is generally below 2.0 for most companies and industries.

What is debt equity ratio how it is calculated? ›

The debt-to-equity (D/E) ratio is used to evaluate a company's financial leverage and is calculated by dividing a company's total liabilities by its shareholder equity. The D/E ratio is an important metric in corporate finance.

What is the debt equity ratio a measure of answer? ›

Debt to equity ratio is calculated to measure the long term soundness of the company.

How are debt ratio calculated? ›

To calculate the debt-to-assets ratio, divide your total debt by your total assets. The larger your company's debt ratio, the greater its financial leverage. Debt-to-equity ratio : This is the more common debt ratio formula. To calculate it, divide your company's total debt by its total shareholder equity.

How to calculate debt-to-equity ratio calculator? ›

You can calculate your business' debt to equity ratio (D/E) by dividing the total liabilities by shareholders' equities. In other words, it is represented by the total debt divided by shareholder shares. This essential information is present in the balance sheet of every company.

How is a good debt to equity ratio? ›

Generally, a good debt to equity ratio is around 1 to 1.5. However, the ideal debt to equity ratio will vary depending on the industry, as some industries use more debt financing than others.

What is a personal debt to equity ratio is how it is calculated and why it is important to know? ›

The debt to equity ratio compares how much debt you have to how much equity you have. This should give you a number less than one. If it is more than one, you have more debt than assets or you have made an error. For instance, you owe $100,000 and have total assets of $200,000.

What is the debt-to-equity ratio example? ›

Debt to Equity Ratio Calculations:

Suppose a Company XYZ Ltd. has total liabilities of Rs 3,000 crore. It has shareholders equity of Rs 15,000 crore. Using the Debt to Equity Ratio formula, you get: Debt to Equity Ratio = 3,000 / 15,000 = 0.2.

What is the debt-to-equity ratio quizlet? ›

What is the Debt-to-Equity ratio? Total Liabilities/Total Owner's Equity. The D/E ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders' equity.

What is an example of a debt ratio? ›

Let's say you have 600,000$ in total assets and 150,000$ in liabilities. To calculate the debt ratio, divide the liability (150,000$ ) by the total assets (600,000$ ). This results in a debt ratio of 0.25 or 25 percent.

Why do we calculate debt ratio? ›

Investors use the ratio to evaluate whether the company has enough funds to meet its current debt obligations and to assess whether it can pay a return on its investment. Creditors use the ratio to see how much debt the company already has and whether the company can repay its existing debts.

Why is the debt-to-equity ratio important? ›

It basically shows the overall health of a particular company. In case if the debt-to-equity ratio is higher, the company is receiving more financing by lending money subjecting to risk, and if potential debts are too high, there are chances of the company getting bankrupt during these times.

How to calculate total debt? ›

You collect all your long-term debts and add their balances together. You then collect all your short-term debts and add them together too. Finally, you add together the total long-term and short-term debts to get your total debt. So, the total debt formula is: Long-term debts + short-term debts.

What if the debt-to-equity ratio is less than 1? ›

The debt to equity ratio shows a company's debt as a percentage of its shareholder's equity. If the debt to equity ratio is less than 1.0, then the firm is generally less risky than firms whose debt to equity ratio is greater than 1.0.

Is debt-to-equity ratio based on book value or market value? ›

The two components are often taken from the firm's balance sheet or statement of financial position (so-called book value), but the ratio may also be calculated using market values for both, if the company's debt and equity are publicly traded, or using a combination of book value for debt and market value for equity ...

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Kelle Weber

Last Updated:

Views: 5331

Rating: 4.2 / 5 (53 voted)

Reviews: 84% of readers found this page helpful

Author information

Name: Kelle Weber

Birthday: 2000-08-05

Address: 6796 Juan Square, Markfort, MN 58988

Phone: +8215934114615

Job: Hospitality Director

Hobby: tabletop games, Foreign language learning, Leather crafting, Horseback riding, Swimming, Knapping, Handball

Introduction: My name is Kelle Weber, I am a magnificent, enchanting, fair, joyous, light, determined, joyous person who loves writing and wants to share my knowledge and understanding with you.