What is Debt-to-Equity Ratio?

The Debt-to-Equity (D/E) ratio measures a company’s debt relative to shareholders’ equity. It is commonly used to assess the company’s financial leverage. Generally, the D/E ratio is calculates uding the following formula:

• Debt to Equity Ratio = Total DebtShareholder’s Equity

Where,

• Shareholders’ Equity = Total Assets – Total Liabilities.

Alternatively, it can also be calculated as:

• Shareholders’ Equity = Share Capital + Reserves & Surplus – Accumulated Losses

For example, suppose a company has a total debt of ₹500 crore and the shareholders’ equity is ₹1,000 crore. Now, the D/E Ratio is 0.5 (₹500 crore divided by ₹1,000 crore), which indicates that the company has ₹0.50 of debt for every ₹1 of shareholders’ equity.

How to Calculate D/E Ratio

The calculation generally involves:

1. Identifying the company’s total debt from its balance sheet.
2. Identifying shareholders’ equity.
3. Dividing total debt by shareholders’ equity.

Note that the appropriate D/E level varies by industry. Capital-intensive businesses may have higher debt levels than businesses that require relatively less external financing. Therefore, D/E should be compared with companies in the same industry and with the company’s historical levels.

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