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

Author

Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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