
Debt Ratios: DebtEquity Ratio
By Richard Loth (Contact  Biography)
The debtequity ratio is another leverage ratio that compares a company's total liabilities to its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed.
To a large degree, the debtequity ratio provides another vantage point on a company's leverage position, in this case, comparing total liabilities to shareholders' equity, as opposed to total assets in the debt ratio. Similar to the debt ratio, a lower the percentage means that a company is using less leverage and has a stronger equity position.
Formula:
Components:

As of December 31, 2005, with amounts expressed in millions, Zimmer Holdings had total liabilities of $1,036.80 (balance sheet) and total shareholders' equity of $4,682.80 (balance sheet). By dividing, the equation provides the company with a relatively low percentage of leverage as measured by the debtequity ratio.
Variations:
A conservative variation of this ratio, which is seldom seen, involves reducing a company's equity position by its intangible assets to arrive at a tangible equity, or tangible net worth, figure. Companies with a large amount of purchased goodwill form heavy acquisition activity can end up with a negative equity position.
Commentary:
The debtequity ratio appears frequently in investment literature. However, like the debt ratio, this ratio is not a pure measurement of a company's debt because it includes operational liabilities in total liabilities.
Nevertheless, this easytocalculate ratio provides a general indication of a company's equityliability relationship and is helpful to investors looking for a quick take on a company's leverage. Generally, large, wellestablished companies can push the liability component of their balance sheet structure to higher percentages without getting into trouble.
The debtequity ratio percentage provides a much more dramatic perspective on a company's leverage position than the debt ratio percentage. For example, IBM's debt ratio of 69% seems less onerous than its debtequity ratio of 220%, which means that creditors have more than twice as much money in the company than equity holders (both ratios are for FY 2005).
Merck comes off a little better at 150%. These indicators are not atypical for large companies with prime credit credentials. Relatively small companies, such as Eagle Materials and Lincoln Electric, cannot command these high leverage positions, which is reflected in their debtequity ratio percentages (FY 2006 and FY 2005) of 91% and 78%, respectively.


NonAssessable Policy
A type of insurance policy that cannot require the policyholder ... 
Development To Policyholder Surplus
The ratio of an insurer’s loss reserve development to its policyholders’ ... 
Earned Premium
The amount of total premiums collected by an insurance company ... 
Net Premiums Written To Policyholder Surplus
A ratio of an insurance company’s gross premiums written less ... 
Net Liabilities To Policyholders' Surplus
The ratio of an insurer’s liabilities, including unpaid claims, ... 
Reserves To Policyholders' Surplus Ratio
The ratio of an insurer’s reserves set aside for unpaid losses ...

What is a good debt ratio, and what is a bad debt ratio?
Learn about the factors that influence how investors and lenders evaluate the debt ratio for a company and why the answer ... 
What measures should a company take if its times interest earned ratio is too high?
Find out why and when a company's times interest earned ratio can be considered too high and what measures can be taken to ... 
Who is eligible to hold a deferred tax asset?
Find out when U.S. companies are allowed to hold deferred tax assets and report them in the financial statements according ... 
How do I evaluate whether a company is a good acquisition candidate?
Evaluate whether a company is a good acquisition candidate by analyzing its price, debt load, litigation and financial statements.