Feb 26, 2023

# Debt-to-Equity Ratio

## What is Debt-to-Equity Ratio?

Debt-to-Equity Ratio is a financial metric that measures a company’s financial leverage and is calculated by dividing total liabilities by total equity. It is an important metric for investors to assess the financial health of a company and its ability to pay off its debts.

## Why Debt-to-Equity Ratio is Important

The Debt-to-Equity Ratio is important because it helps investors to determine how much debt a company is carrying relative to its equity. A higher Debt-to-Equity Ratio means that the company is more leveraged and is carrying a larger amount of debt relative to its equity. A lower Debt-to-Equity Ratio indicates that the company has less debt relative to its equity.

## How Debt-to-Equity Ratio is Calculated

Debt-to-Equity Ratio is calculated by dividing total liabilities by total equity. The formula is as follows:

Debt-to-Equity Ratio = Total Liabilities / Total Equity

## How to Improve Debt-to-Equity Ratio

There are several ways to improve a company’s Debt-to-Equity Ratio. These include:

Paying down debt

Increasing equity through equity contributions

Increasing revenue to reduce debt

Reducing expenses to reduce debt

Selling non-core assets to pay down debt

## Why Investors Value Low or Moderate Debt-to-Equity Ratio

Investors value companies that have low or moderate Debt-to-Equity Ratios because it indicates that the company is not overly leveraged and is in a better position to withstand economic downturns. Companies with high Debt-to-Equity Ratios may be more likely to default on their debt obligations.

## How Debt-to-Equity Ratio Relates With Other Financial Metrics

Debt-to-Equity Ratio is closely related to other financial metrics such as Return on Equity (ROE). ROE measures a company’s ability to generate profit from its equity. A higher Debt-to-Equity Ratio can reduce ROE because it indicates that the company is more leveraged and is using more of its equity to finance its debt.

## Conclusion

Debt-to-Equity Ratio is an important metric for investors to assess the financial health of a company and its ability to pay off its debts. A lower Debt-to-Equity Ratio indicates that the company has less debt relative to its equity and is in a better position to withstand economic downturns. It is also closely related to other financial metrics such as Return on Equity (ROE).

## Sources

Investopedia. (2020). Debt-to-Equity Ratio. Retrieved from https://www.investopedia.com/terms/d/debt-equity-ratio.asp

Investopedia. (2020). Return on Equity (ROE). Retrieved from https://www.investopedia.com/terms/r/returnonequity.asp

Investopedia. (2020). What is a Good Debt-to-Equity Ratio? Retrieved from https://www.investopedia.com/articles/investing/081516/what-good-debtequity-ratio.asp

Investopedia. (2020). How to Improve Your Debt-to-Equity Ratio. Retrieved from https://www.investopedia.com/ask/answers/051415/how-can-i-improve-my-debtequity-ratio.asp

# Debt-to-Equity Ratio

## What is Debt-to-Equity Ratio?

Debt-to-Equity Ratio is a financial metric that measures a company’s financial leverage and is calculated by dividing total liabilities by total equity. It is an important metric for investors to assess the financial health of a company and its ability to pay off its debts.

## Why Debt-to-Equity Ratio is Important

The Debt-to-Equity Ratio is important because it helps investors to determine how much debt a company is carrying relative to its equity. A higher Debt-to-Equity Ratio means that the company is more leveraged and is carrying a larger amount of debt relative to its equity. A lower Debt-to-Equity Ratio indicates that the company has less debt relative to its equity.

## How Debt-to-Equity Ratio is Calculated

Debt-to-Equity Ratio is calculated by dividing total liabilities by total equity. The formula is as follows:

Debt-to-Equity Ratio = Total Liabilities / Total Equity

## How to Improve Debt-to-Equity Ratio

There are several ways to improve a company’s Debt-to-Equity Ratio. These include:

Paying down debt

Increasing equity through equity contributions

Increasing revenue to reduce debt

Reducing expenses to reduce debt

Selling non-core assets to pay down debt

## Why Investors Value Low or Moderate Debt-to-Equity Ratio

Investors value companies that have low or moderate Debt-to-Equity Ratios because it indicates that the company is not overly leveraged and is in a better position to withstand economic downturns. Companies with high Debt-to-Equity Ratios may be more likely to default on their debt obligations.

## How Debt-to-Equity Ratio Relates With Other Financial Metrics

Debt-to-Equity Ratio is closely related to other financial metrics such as Return on Equity (ROE). ROE measures a company’s ability to generate profit from its equity. A higher Debt-to-Equity Ratio can reduce ROE because it indicates that the company is more leveraged and is using more of its equity to finance its debt.

## Conclusion

Debt-to-Equity Ratio is an important metric for investors to assess the financial health of a company and its ability to pay off its debts. A lower Debt-to-Equity Ratio indicates that the company has less debt relative to its equity and is in a better position to withstand economic downturns. It is also closely related to other financial metrics such as Return on Equity (ROE).

## Sources

Investopedia. (2020). Debt-to-Equity Ratio. Retrieved from https://www.investopedia.com/terms/d/debt-equity-ratio.asp

Investopedia. (2020). Return on Equity (ROE). Retrieved from https://www.investopedia.com/terms/r/returnonequity.asp

Investopedia. (2020). What is a Good Debt-to-Equity Ratio? Retrieved from https://www.investopedia.com/articles/investing/081516/what-good-debtequity-ratio.asp

Investopedia. (2020). How to Improve Your Debt-to-Equity Ratio. Retrieved from https://www.investopedia.com/ask/answers/051415/how-can-i-improve-my-debtequity-ratio.asp