Debt-to-Equity Ratio
factor.formula
Debt-to-Equity Ratio:
The formula calculates the ratio of a company's total liabilities to its total shareholders' equity at the end of a specific reporting period.
- :
It represents the total liabilities of the enterprise in period t (usually the latest reporting period). Liabilities include current liabilities (such as accounts payable, short-term loans) and non-current liabilities (such as long-term loans, bonds). This data is usually found in the balance sheet.
- :
It represents the total amount of shareholders' equity of the enterprise in period t (usually the latest reporting period). Shareholders' equity includes paid-in capital (or share capital), capital reserve, surplus reserve, retained earnings, etc. This data can usually be found in the balance sheet.
factor.explanation
The debt-to-equity ratio is an important indicator for measuring a company's financial leverage. It reveals the proportional relationship between the funds provided by creditors and the funds provided by shareholders in the composition of a company's assets. A higher debt-to-equity ratio means that more of the company's funds come from debt, which may increase the company's financial risk because the company needs to pay interest and bear repayment obligations. When a company's profitability declines or faces economic downward pressure, a higher debt level may lead to an increased risk of default. On the contrary, a lower debt-to-equity ratio means that the company mainly relies on its own capital operations, has a more robust financial structure, stronger debt repayment ability, and relatively more secure creditor rights. However, in actual application, it is necessary to analyze it in combination with industry characteristics and the specific circumstances of the company. The reasonable level of this ratio varies greatly among different industries.