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The debt to equity ratio (D/E) is a financial ratio indicating the relative proportion of equity and debt used to finance a company's assets. It is equal to 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. A financial ratio is a ratio of two numbers of reported levels or flows of a company. ...
In the most general sense, a liability is anything that is a hindrance, or puts individuals at a disadvantage. ...
In business and accounting, the shareholders equity refers to the amount of assets that are owned by a companys shareholders. ...
A balance sheet, in formal bookkeeping and accounting, is a statement of the book value of a business or other organization or person at a particular date, often at the end of its fiscal year, as distinct from an income statement, also known as a profit and loss account (P...
Literally a public company is a company owned by the public. ...
Preferred shares can be considered part of either. It is a subjective decision.
When it is used to calculate a company's "financial leverage" the debt usually includes only the Long Term Debt (LTD). Quoted ratios can even exclude the current portion of the LTD. 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. Leverage is using given resources in such a way that the potential positive or negative outcome is magnified. ...
The Modigliani-Miller theorem (of Franco Modigliani, Merton Miller) forms the basis for modern thinking on capital structure. ...
Formula
D/E = Debt (long term liabilities only) / Equity
A similar ratio is debt to total assets (D/A)
D/A = debt / assets = debt / (debt + equity)
Example General Electric Co. ([1]) - Debt / equity: 3.336 (total debt / stockholder equity) (340/79) (?)
- Other equity / shareholder equity: 7.177 (568,303,000/79,180,000)
- Equity ratio: 12% (shareholder equity / all equity) (79,180,000/647,483,000)
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. The cost of capital for a firm is a weighted sum of the cost of equity and the cost of debt (see the financing decision). ...
In business and accounting, the shareholders equity refers to the amount of assets that are owned by a companys shareholders. ...
See also A financial ratio is a ratio of two numbers of reported levels or flows of a company. ...
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