What is debt ratio

The debt to equity ratio (D/E) is a financial ratio, which is equal to an entity's total liabilities divided by shareholders' equity. The two components are often taken from the firm's balance sheet (or statement of financial position), but they might also be calculated using their market values if both the company's debt and equity are publicly traded. It is used to calculate a company's "financial leverage" and indicates what proportion of equity and debt the company is using to finance its assets. The composition of equity and debt and its influence on the value of the firm is much debated and also described in the Modigliani-Miller theorem. Debt evaluation calculator, debt evaluator, debt ratio - MSN Money.

Formula

D/E = Debt (total liabilities) / Equity

A similar ratio is debt to total assets (D/A)

D/A = debt / assets = debt / (debt + equity)

Example

General Electric Co. ([1])

Cost of capital

In a cost of capital calculation the equity in the debt/equity ratio is the market value of all equity (all shares), not just shareholders' equity. Debt capital divided by total assets.