## What is Debt Equity Ratio (D/E ratio)?

The debt-to-equity ratio (D/E ratio) is a financial ratio that measures the proportion of a company’s total debt to its shareholders’ equity. It provides insight into the company’s capital structure and indicates the extent to which it relies on debt financing versus equity financing.

To calculate the debt-to-equity ratio, you can use the following formula:

D/E Ratio = Total Debt / Shareholders’ Equity

Where:

• Total Debt: The sum of all outstanding debt obligations of the company, including long-term debt, short-term debt, and any other borrowings.
• Shareholders’ Equity: The residual interest in the assets of the company after deducting all liabilities. It represents the shareholders’ ownership in the company and is calculated as the difference between total assets and total liabilities.

For example, if a company has \$500,000 in total debt and \$1,000,000 in shareholders’ equity, the calculation would be as follows:

D/E Ratio = \$500,000 / \$1,000,000 = 0.5

In this case, the debt-to-equity ratio is 0.5, which means that the company has \$0.50 of debt for every \$1 of shareholders’ equity.The interpretation of the debt-to-equity ratio depends on the industry and company’s specific circumstances. In general, a higher debt-to-equity ratio indicates a higher proportion of debt financing and may suggest higher financial risk and leverage. Conversely, a lower ratio suggests a lower reliance on debt and potentially a more conservative financial structure.