Loading the player...
A:

Expressed as a percentage, the debt-to-equity ratio shows the proportion of equity and debt a firm is using to finance its assets, and the extent to which shareholder's equity can fulfill obligations to creditors in the event of a business decline. A low debt-to-equity ratio indicates lower risk, since debt holders have less claim on the company's assets. A higher debt-to-equity ratio, on the other hand, shows that a company has been aggressive in financing its growth with debt, and there may be a greater potential for financial distress if earnings do not exceed the cost of borrowed funds.

To calculate debt-to-equity, divide total liabilities by total shareholders' equity:

Debt-to-Equity ratio = Total liabilities ÷ Total shareholders' equity

For example, the balance sheet for Amazon, Inc (AMZN) for the first quarter of 2017 shows (in millions) total liabilities of $59,295 and total shareholders' equity of $21,674. Using the above formula, the debt-to-equity ratio for KO can be calculated as:

Debt-to-equity = $59,295 ÷ $21,674 = 2.74 (or 274%)

This means that AMZN has $2.74 of debt for every dollar of equity. During the same quarter, eBay, Inc. (EBAY) had a debt-to-equity ratio of 1.14, and Netflix, Inc. (NFLX) had a ratio of 3.83. At 2.74, Amazon's debt-to-equity ratio is higher than eBay's but lower than Netflix's.

The debt-to-equity ratio can help investors identify companies that are highly leveraged and that may pose a higher risk. Investors can compare a company's debt-to-equity ratio against industry averages and/or other similar companies to gain a general indication of a company's equity-liability relationship. As with other financial ratios, it is more useful to compare various companies within the same industry than to look at only one company, or to attempt to compare companies from different industries. In addition, investors should consider more than one ratio (or number) when making investment decisions since one ratio cannot provide a comprehensive view of the company.

RELATED FAQS
  1. Is there value in comparing companies from different sectors by using the debt-to-equity ...

    Find out why using the debt-to-equity ratio for reviewing companies doesn't always make for an apples-to-apples comparison. Read Answer >>
  2. 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. Read Answer >>
  3. Why do shareholders need financial statements?

    Discover the importance of a company's financial statements for stock shareholders in evaluating their equity investment ... Read Answer >>
  4. What is the difference between the debt ratio of a company and the debt ratio of ...

    Discover the different financial evaluation measures that are most commonly applied to individuals and corporations, respectively. Read Answer >>
  5. What debt/equity ratio is common for companies in the telecommunications sector?

    Learn the average debt-to-equity ratio for the telecommunications sector and how including operating leases can substantially ... Read Answer >>
Related Articles
  1. Investing

    What Is Considered A High Debt-To-Equity Ratio?

    The debt-to-equity ratio divides a firm’s liabilities by its shareholders’ equity to measure its financial leverage.
  2. Investing

    Debt Reckoning

    Learn about debt ratios and how to use them to assess a company's financial health. You could save a lot of money!
  3. Investing

    Understanding Leverage Ratios

    Large amounts of debt can cause businesses to become less competitive and, in some cases, lead to default. To lower their risk, investors use a variety of leverage ratios - including the debt, ...
  4. Investing

    What is the Gearing Ratio?

    Gearing ratios are financial ratios that measure a company’s leverage.
  5. Investing

    Useful Balance Sheet Metrics

    These metrics can help you better understand the information found on balance sheets.
  6. Investing

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  7. Investing

    Analyzing AT&T's Debt Ratios in 2016 (T)

    Learn about AT&T Inc. and its key debt ratios, such as the debt-to-equity ratio, interest coverage ratio and cash flow-to-debt ratio.
  8. Investing

    Analyzing Wal-Mart's Debt Ratios in 2016 (WMT)

    Analyze Wal-Mart's debt-to-equity ratio, interest coverage ratio and cash flow-to-debt ratio to evaluate the company's financial health and debt management.
  9. Investing

    6 Basic Financial Ratios And What They Reveal

    Here's a brief introduction to six financial ratios every investor should be familiar with.
  10. Investing

    Analyzing Apple's Debt Ratios in 2016 (AAPL)

    Discover detailed analyses of Apple's four debt ratios over quarterly and annual periods between 2014 and 2015, and learn why it is financially stable.
RELATED TERMS
  1. Optimal Capital Structure

    The best debt-to-equity ratio for a firm that maximizes its value. ...
  2. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ...
  3. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained ...
  4. Capitalization Ratios

    Indicators that measure the proportion of debt in a company’s ...
  5. Long Term Debt To Total Assets Ratio

    A measurement representing the percentage of a corporation's ...
  6. Debt/Equity Ratio

    The D/E ratio indicates how much debt a company is using to finance ...
Hot Definitions
  1. IRR Rule

    A measure for evaluating whether to proceed with a project or investment. The IRR rule states that if the internal rate of ...
  2. Short Covering

    Short covering is buying back borrowed securities in order to close an open short position.
  3. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  4. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  5. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  6. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
Trading Center