What Is The Debt To Equity Ratio?

This is a financial ratio signify the relative proportion of equity and debt used to finance assets. It equals the liabilities divided by the equity of the shareholder. The liabilities and the equities are taken from the company's financial books. It is also possible to calculate this ratio by using the market values for both the components. This is possible only if the value of a company's debt and equity are available at the stock market i.e. if they are publicly traded.

All liabilities are usually referred to as debts by the financial economists. Therefore, the statement that assets equal equity is then by definition, true.

The formula for debt to equity ratio is
D/E = Liabilities/Equity

(The liabilities sometimes only include the long term debts (D))

As mentioned above Asset (A) equals a sum of equity and liabilities.

Therefore A = E + L
   A = E + D
   E = A - D

This implies that D/E equals D/ (A-D)

The debt to equity ratio depicts how a company operates. A high ratio normally means that a company belligerent in external financing. This could result in unstable earnings due to added interest expenses.