Debt equity ratio

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13 January 2014 how to compute debt equity ratio and what to include i n shareholders equity?

Hemant Kumar

Hemant Kumar (Expert)
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13 January 2014 Debt-to-Equity ratio is the ratio of total liabilities of a business to its shareholders' equity. It is a leverage ratio and it measures the degree to which the assets of the business are financed by the debts and the shareholders' equity of a business.

Formula

Debt-to-equity ratio is calculated using the following formula:

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

Shareholders' equity comes from two main sources. The first and original source is the money that was originally invested in the company, along with any additional investments made thereafter. The second comes from retained earnings which the company is able to accumulate over time through its operations. In most cases, the retained earnings portion is the largest component.