How to Calculate Your Debt to Equity Ratio

The debt to equity ratio is a calculation that takes a companies financial leverage and measures it in terms of debt and equity. It can also be looked at as long-term debt divided by the shared shareholders’ equity. (DTE method debt to equity)

Typically when you decide to invest into a company, the higher the ratio the riskier it could be especially if the interest rates are rising. If you are finding that your solution to this equation is greater 50%, then the numbers should be looked at very carefully to make sure there are no liquidity issues.

A higher ratio shows investors and lenders that there is increased risk that this company may default on a debt that is owed.

Sometimes depending on what kind of industry you are in, the DTE will vary greatly and may average something different. An industry that is capital intensive, such as a car manufacturer, may have a DTE of over 2:0, but a paper manufacturing company could have a DTE of under 50%. This makes sense considering the industries. Before calculating the DTE it is best to get the industry average.

A company’s source of capital can come from the following: shared stock, retained earnings, and preferred stock.

Calculating Company’s Debt to Equity Ratio

– You will need the companies complete debt. This will include all debts that are owed by the company, which can include short-term, and long-term debts that are listed on the financial statement.

– Next, you will need the company’s total equity. This will be all the assets that the company owns and can also include both short term and long term assets.

– Divide the debt by the total equity. The solution will be the total debt that the company owes compared to the equity that is in the company.

Many times financial institutions will ask to see this ratio. You or an accountant can calculate it yourself to get a rough idea of where the company stands before seeking financing; however, the lender will most always want to see your financial documents and compute this number for themselves.

It is always best to check with your accountant to verify this ratio’s accuracy before submitting it to edges for financing.

An example of a DTE ratio

Company’s Total Debt = $800
Company’s Total Assets = $8500
DTI = 9.4%

Once again, the company’s debt to equity ratio is a measurement a company’s ability to borrow and repay money. It is very useful to use this ratio for a period of years and then take into account of debt repayments and analyze what numbers are truly driving this ratio; this will give you a truer picture of a company’s solvency.

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