
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.
Debt Ratios: Capitalization Ratio
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