
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.


Insurance Regulatory Information System (IRIS)
A collection of databases and tools used to analyze the financial ... 
Book Value Reduction
Reducing the value at which an asset is carried on the books ... 
Deferred Tax Asset
A deferred tax asset is an asset on a company's balance sheet ... 
Earnings Per Share  EPS
The portion of a company's profit allocated to each outstanding ... 
Return On Investment  ROI
A performance measure used to evaluate the efficiency of an investment ... 
Working Capital
This ratio indicates whether a company has enough short term ...

What is the minimum amount of money that I can invest in a mutual fund?
Learn about investing in mutual funds even with a smaller initial investment; there are many funds available to investors ... 
Which leverage ratios are most useful for analyzing manufacturing companies?
See which leverage ratios investors and creditors are likely to use when analyzing the debt burdens for manufacturing companies. 
How do I sign up for a TreasuryDirect account?
Invest in Treasury securities by dealing directly with the U.S. Department of the Treasury online, conveniently managing ... 
What is the difference between cash flow and free cash flow?
Learn about the main differences between cash flow and free cash flow. In addition to the differences, learn how to calculate ...