Debt-to-Equity Ratio
D/E = Total Debt / Total Equity
Shows how much debt a company uses relative to equity. Higher D/E means more financial leverage and risk.
Variables
Short-term plus long-term borrowings
Shareholders' equity from the balance sheet
Example Calculation
Scenario
A firm has $400,000 in total debt and $600,000 in equity.
Given Data
Calculation
D/E = 400,000 / 600,000 = 0.67
Result
0.67
Interpretation
For every dollar of equity, the firm has $0.67 of debt—moderate leverage.
When to Use This Formula
- ✓Evaluating capital structure risk
- ✓Comparing leverage across firms
- ✓Input for WACC weight calculations
Common Mistakes
- ✗Mixing book value and market value
- ✗Excluding off-balance-sheet debt
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Common questions about this formula
It depends on the industry. Utilities often exceed 2.0, while tech firms may be under 0.5.
Market value is preferred because it reflects the true economic cost of debt. However, if market debt data is unavailable, book value is an acceptable approximation since debt market values tend to be closer to book values than equity.