How to Calculate the Debt to Equity Ratio of a Company
Original post by C. Taylor of Demand Media
Investors commonly use the debt-to-equity ratio when evaluating a company because it offers insight to a company's primary funding sources. This ratio represents the amount of outstanding debt from creditors divided by the equity gained by shareholders purchasing stock. A high debt-to-equity ratio may indicate an over-dependence on debt, which could negatively effect earnings. A low ratio means the company depends primarily on shareholder equity.
Contents |
Step 1
Consult the company's balance sheet and get the outstanding debt and the shareholder equity.
Step 2
Divide the debt by the equity to calculate the ratio. As an example, if a company has $3 million in debt with $4 million in shareholder equity, then the debt-to-equity is 0.75.
Step 3
Compare this ratio to 1. A debt-to-equity ratio greater than 1 means the company relies more heavily on debt to run the business. A ratio less than 1 means the company primarily relies on equity for financing.
References
About the Author
C. Taylor has been a professional writer since 2009. He has written for online publications and the "Journal of Asian Martial Arts." Taylor specializes in martial arts, traveling, sciences and computer repair. He received a Master of Science in wildlife biology from Clemson University and a Bachelor of Arts in biological sciences from the College of Charleston.
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