Financial modelling terms explained

# Debt Equity Ratio

The debt equity ratio is a financial ratio that measures the proportion of a company's assets that are financed by creditors or debt.

## What Is a Debt Equity Ratio?

A debt equity ratio is a measure of a company's financial leverage calculated by dividing a company's total liabilities by its total shareholders' equity. It indicates what proportion of equity and debt the company is using to finance its operations. A higher debt equity ratio means that a company is more leveraged and therefore more risky.

## How Do You Calculate a Debt Equity Ratio?

A debt equity ratio is a calculation that shows how much debt a company has compared to its equity. The debt equity ratio is calculated by dividing a company's total liabilities by its total shareholders' equity. This calculation gives a company's creditors a measure of how much debt they are exposed to in relation to the company's equity. A high debt equity ratio can be a sign that a company is in financial trouble, while a low debt equity ratio can be a sign that a company is in good financial shape.

## What is the Difference Between a Debt Equity Ratio and a Debt to Assets Ratio?

There are two main types of debt ratios: the debt equity ratio and the debt to assets ratio. The debt equity ratio measures how much debt a company has compared to its shareholders' equity. The debt to assets ratio measures how much debt a company has compared to its total assets. Both of these ratios are important indicators of a company's financial health. A high debt to equity ratio or a high debt to assets ratio means that a company is taking on a lot of debt, which could lead to financial problems down the road.

## What is an Example of a Debt Equity Ratio?

Debt equity ratio is the calculation of a company's financial leverage by dividing its total liabilities by its total shareholders' equity. This ratio shows the percentage of a company's equity that is provided by creditors. A higher debt equity ratio generally means a company is more risky, because it is more likely to default on its debt.

An example of a debt equity ratio calculation would be to take a company's total liabilities of \$10,000 and divide that by the company's total shareholders' equity of \$5,000. This would result in a debt equity ratio of 2:1, which would indicate that the company's creditors have a 2:1 claim on the company's equity.

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