debt-to-equity ratio

This ratio measures financial risk by identifying the relationship of debt to ownership interest in the firm’s financial structure. It measures a firm’s leverage by comparing long-term debt directly to shareholder’s equity. The formula is total long-term debt divided by total shareholder’s equity. The debt-to-equity ratio is similar to the debt ratio, but it normally eliminates the use of short-term (operational) liabilities that companies use to fund day-to-day operations. Some believe this is a more accurate reading of a company’s financial position, as it does not count items such as accounts payable in the calculation of debt. A smaller number means a company is less reliant on debt as compared to equity and also generally translates to less risk. On the other hand, shareholder’s equity carries no guarantee of income to investors. Acceptable numbers will vary across industries and companies.