Financial Analysis: Debt to Equity Ratio Example


The debt to equity ratio tells us the proportional relationship of total liabilities to total equity. This ratio is a variant of the debt ratio. The debt to equity ratio is a measure of solvency. The debt to equity ratio is calculated as total liabilities divided by total equity. It tells whether a company’s assets are financed more by debt or by equity. When this ratio is greater than 1, it means that the assets are financed more with debt. When it is less than 1, it means more assets are financed with equity. Here is the liabilities and equity section of a Balance Sheet. We’ll use the total liabilities and total stockholders’ equity to determine the debt to equity ratio. For 2015, total liabilities divided by total equity gives us a debt to equity ratio of .63 For 2016, total liabilities divided by total equity gives us a debt to equity ratio of .23 This company has elected to finance more assets with equity rather than debt. Although this is a less risky means of financing, it is more costly.




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