How this calculator works
The debt to equity ratio divides total liabilities by shareholders' equity. A ratio of 0.67 means a company owes 67 cents for every dollar of book equity. It is a gearing measure: a higher ratio means more of the balance sheet is funded by creditors, so earnings are more sensitive to interest rates and a downturn. Definitions differ. Some analysts count only interest-bearing debt; this page uses total liabilities, which is the common corporate-finance version and includes trade payables. Keep the same definition when comparing periods or companies.
Formula
Debt to equity = total liabilities / shareholders' equity. The equity multiplier is total assets / equity, which equals 1 + debt to equity. The liability share of assets is liabilities / (liabilities + equity).
Worked example
A company with $400,000 of total liabilities and $600,000 of equity has a debt to equity ratio of 0.6667. Assets are $1,000,000, so the equity multiplier is 1.6667 and liabilities are 40% of assets.
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Frequently asked questions
Why does a negative equity value break the ratio?
Dividing by zero or a negative number does not describe gearing. When equity is negative, total liabilities exceed assets and the company is insolvent on a book basis; look at liquidity and debt covenants instead.
Should I use book or market equity?
Book equity is what the accounts report and is easy to compare. Market equity reflects investors' valuation but moves daily. Use one consistently and state which.
Is a high ratio bad?
Not automatically. Borrowing can be cheaper than equity and can raise returns when investments earn more than the interest. The risk is that fixed interest payments become hard to meet in a downturn.