Debt to Equity Ratio
Understanding the Debt to Equity Ratio: Assessing Financial Leverage
The Debt to Equity Ratio is a financial metric that compares a company's total debt to its shareholders' equity. This ratio indicates the relative proportion of debt and equity used to finance the company's assets, providing insights into its financial leverage and risk.
Debt to Equity Ratio = Total Debt / Shareholders’ Equity
Suppose Company MNO has the following financial details:
Total Debt: $500,000
Shareholders' Equity: $1,000,000
To calculate the Debt to Equity Ratio:
Divide total debt by shareholders' equity: 500,000/1,000,000=0.5
A Debt to Equity Ratio of 0.5 indicates that Company MNO has 50 cents of debt for every dollar of equity. This suggests a relatively low level of financial leverage and potentially lower financial risk.
Leverage Ratio