Definition of Debt to Equity Ratio
The debt to equity ratio or debt-equity ratiois the result of dividing a corporation’s total liabilities by the total amount of stockholders’ equity.
Expressed as a formula, the debt to equity ratio is:(Liabilities/Stockholders’ Equity):1.
Generally, the higher the ratio of debt to equity, the greater is the risk for the corporation’s creditors and prospective creditors.
Example of Debt to Equity Ratio
A corporation with $1,200,000 of liabilities and $2,000,000 of stockholders’ equity will have a debt to equity ratio of 0.6:1. A corporation with total liabilities of $1,200,000 and stockholders’ equity of $400,000 will have a debt to equity ratio of 3:1.
