Debt to equity ratio
From Wikipedia, the free encyclopedia
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.
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.
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[edit] 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)
[edit] 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)
[edit] 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.
