Debt-to-equity ratio

Definition

The debt-to-equity ratio is a financial metric that compares a company's total liabilities to its shareholders' equity. It indicates the relative proportion of debt and equity used to finance a company's assets.

5 Must Know Facts For Your Next Test

1. A high debt-to-equity ratio may indicate higher financial risk due to increased debt levels.
2. It is calculated by dividing total liabilities by shareholders' equity.
3. A lower ratio suggests that a company is using less leverage and relying more on equity financing.
4. This ratio helps investors understand the financial structure and risk profile of the company.
5. Industry norms vary; what is considered an acceptable ratio in one industry might be high or low in another.

Review Questions

Related terms

Leverage: The use of borrowed funds to increase the potential return on investment.

Shareholders' Equity: The residual interest in the assets of the entity after deducting liabilities.

Total Liabilities: The combined debts and obligations that a company owes to outside parties.