Debt to equity ratio : Meaning, Formula and Example

The debt to equity measures how much of the company is financed by its debt holders compared with its owners and is another measure of financial health. A company with a large amount of debt will have a very high debt to equity ratio, whereas one with little debt will have a low debt to equity ratio. Companies with lower debt to equity ratios are generally less risky than those with higher debt to equity ratios.

Formula for Debt to equity ratio

\[debt\,to\,equity\,ratio = \frac{{Total\,liabilities}}{{Total\,equity}}\]

Example

Sun Pharma has total liabilities of Rs.51,430 and equity of Rs.52,070. This gives a debt to equity ratio of 0.98. There is no specific optimal capital structure for a company. What is optimal for one company might not be right for another. There needs to be a balance between debt and equity financing. Debt financing typically offers the lowest rate. However, too much debt financing is rarely the optimal structure, as debt has to be paid back even when the company is going through troubled times.

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Author and Assistant Professor in Finance, Ardent fan of Arsenal FC. Always believe "The only good is knowledge and the only evil is ignorance - Socrates"
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