Debt to Equity Ratio Calculation

Debt to Equity Ratio Calculation. How to calculate the Debt Equity Ratio, Debt vs Equity Financing and more.

Debt Equity Ratio

The debt to equity ratio is an important determinant of the financial strength of a company. This ratio determines the mix of funds on the balance sheet. The more funds supplied and not borrowed, the more equity the company has. Funds that have been borrowed would be called debt.

Different ways to measure debt

Depending on the financial institution, there may be different interpretations of what debt really comprises: long-term loans only; long-term and short-term loans; long-term loans and all current liabilities (this measures total debt, including all accruals such as dividends and taxes).

How to Calulate Debt to Equity Ratio

Debt over Equity

This is the most common way to calculate the debt/equity ratio. Most debt/equity ratios quoted would be this ratio. It divides total debt by current equity (own funds):

Debt to Equity Ratio = (Total Debt) / (Total Equity)

Total Debt over Total Funds

This is a less common way to calculate the debt/equity ratio, but it actually gives a much clearer and more direct way to gauge a company’s balance sheet. This divides total debt by total funds (total equity + total debt):

Total Debt/Fund Ratio = (Total Debt) / (Total Equity + Total Debt)

Sometimes, the figure for total equity over total funds may be quoted instead.

Applications of the Debt to Equity Ratio

More on Debt vs Equity Financing – which strategy should you adopt for your small business?

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