Answers the Question
How is this company funding its growth?
Calculator for Debt to Equity Ratio
What Is the Debt to Equity Ratio?
There's no way to get around it. Debt means risk. If a company is using debt to grow, the debt will need to be paid back (or the company will need to either default or get liquidated). The debt to equity formula provides insight as to how a company is funding its growth.
Why Is it Important?
- All things being equal, the higher the level of debt, the more risky the investment.
Formula(s) to Calculate Debt to Equity Ratio
- DEBT TO EQUITY = TOTAL LIABILITIES / TOTAL EQUITY
- Assuming that this formula is always calculated in the same way. Depending upon the circumstance, preferred stock can be considered as either equity or debt by financial accountants.
- Not considering the nature of each debt. For instance, debt secured against the assets of the company is likely of greater importance than debt that was taken on with no security, or debt that can be renegotiated easily.
- Assuming that every firm, at every point in its life cycle, in every industry will share an ideal debt to equity ratio.
- Considering all debt to be equal. Short-term debt may be far more dangerous than long-term debt, especially in environments with poor liquidity.