Debt to Equity Ratio Formula & Example

Definition: Debt to Equity Ratio (D/E) is a financial ratio used to measure the relationship between the capital contributed by creditors and the capital contributed by shareholders. The ratio is also known as Risk, Gearing or Leverage.

Formula:
D/E = Total Debt (liabilities)/ Total Equity
* Sometimes only long-term debt is used instead of total liabilities in the calculation.

Example 1:
Bentley Company has a long-term debt of $20,000 and shareholder's equity of $50,000, then the debt/equity ratio is: 20,000 divided by 50,000 = 0.4

Example 2:
The following information relates to Jeff Ltd. at the end of the year:
Short-Term Debt $300,000
Common Equity $200,000
Long-Term Debt $600,000
Preferred Equity $250,000
Additional Paid In Capital $50,000
Retained Earnings $220,000
Calculate the Debt to Equity Ratio.

Answer:
Total Debt = Short-Term Debt + Long-Term Debt = 300,000 + 600,000 = $900,000
Total Shareholders' Equity = Common Equity + Preferred Equity + Additional Paid In Capital + Retained Earnings = 200,000 + 250,000 + 50,000 + 220,000 = $720,000
D/E = 900,000 / 720,000 = 1.25 times

* Next: Acid-Test Ratio Formula & Example
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