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# Debt to Equity ratio

The debt to equity ratio is a financial, liquidity ratio that brings into comaprison, a company’s total debt to total equity. The debt to equity ratio indicates the percentage of financing of the company that is brought in from creditors and investors. A higher debt to equity ratio suggests that there is more utilisation of fincances from the creditor (bank loans) than the finances from investor (shareholders).

### Formula to calculate Debt to Equity ratio

To calculate debt to equity ratio, total liabilities are divided by total equity. So, this gives us the formula:

Debt to Equity Ratio = Total Liabilities/Total Equity

### Application of Debt to Equity ratio

Different industries have different debt to equity ratio benchmarks, as some industries prefer to utilise more debt financing than others. A debt ratio of .5 will indicate that there are half as many liabilities than there is equity. Simply put, the assets of the company are funded 2:1 by investors to creditors. This means that investors own 66.6 cents of every dollar of company assets while creditors only own 33.3 cents on the dollar.

### Example

If a balance sheet shows a total debt of a business as \$80 million and the total equity is worth \$120 million, then debt-to-equity is 0.67. This suggests that for each dollar in equity, the firm has 67 cents in leverage. A ratio of 1 indicates that creditors and investors are equally involved in the company’s assets.

A higher debt-equity ratio indicates a levered firm, which is a good sign for companies that have stable and significant cash flow generation, but it can be a problem for a company that is in decline. Simply put, a lower ratio shows that a firm is less levered and mjorly financed by equity. The appropriate debt to equity ratio varies by industry.

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