Debt-to-equity-ratio meaning

The definition of a debt to equity ratio is a calculation used to determine whether a business will be able to pay their debts, and is calculated by the total liabilities of a company divided by the equity owned by the shareholders.

An example of a company's debt to equity ratio is 2 when a company has $1,000,000 in liabilities and equity of $500,000.

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A company’s total liabilities divided by stockholders’ equity. The ratio shows how indebted a company is. A higher proportion of debt compared to equity as a contributor to a firm’s capital makes earnings more volatile and increases the likelihood that the company will not be able to meet its interest payments and may default. A company with a high debt-to-equity ratio can become a potential credit risk if the economy slows down or if competition increases.
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