Debt to Equity Ratio

Debt to Equity Ratio

What is the debt to equity ratio and does it apply to all business? The short answer is that investors and creditors use it to see if a business is likely to pay back its debt and sustain a decline in sales. This applies to most business, but it is not relevant to companies that don’t have debt. These two issues determine if the company is vulnerable to changes in the business cycle. If it is highly leveraged – meaning a high proportion of debt financing – it is riskier.

Reasons for the Debt to Equity Ratio

One reason that investors look at this leverage ratio is to judge whether the company will always be able to service its loans. If your ability to continually pay off debt is questionable, this highly geared (highly leveraged) business is not worth the risk. High debt payments can absorb any free cash flow in a business and lead it to a halt.

Debt to Equity Formula

The debt to equity formula is total liabilities/equity. This is the simplest version of the equation and considers both long and short term debt. Other versions of the debt to equity formula are adjusted to show long term debt/equity. This can be useful for certain industries but you should also compare it to the original formula (total liabilities/equity).
One thing about the debt to equity formula is that it is only one ratio. It does not give an in-depth view of the company’s debts but simply makes it easy to tell if something is noticeably off. Companies can also distort this ratio in an attempt to make another ratio look better. One example of this is with return on equity. If a business wants to keep a very high return on equity, it will only accept a certain amount of equity. The rest of the required financing will be from debt, thus optimizing the effect of the equity investment.
How do you use the debt to equity formula in your business? For further reading about debt to equity ratios, check out this article.
If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.
Debt to Equity Ratio, Debt to Equity Formula
[box]Strategic CFO Lab Member Extra
Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]
Debt to Equity Ratio, Debt to Equity Formula


The Struggles of Private Company Accounting

Hiring the right accountant  When I meet a business owner operating at a successful $10 million in revenue, they often mention, “My CPA”… I immediately know that CEO/Entrepreneur is referring to their Tax CPA.  That is because one thing that all Entrepreneurs have in common is that they must file a tax return.  So, from

Read More »


Friend of the firm, Birgit Kamps, recently had Strategic CFO President, Dan Corredor, as a guest on her podcast, CEO Blindspots. CEO BLINDSPOTS HOST: Birgit Kamps. She was speaking five languages by the age of 10, and lived in five countries with her Dutch parents prior to becoming an American citizen. Birgit’s professional experience includes starting

Read More »

SHRM calls ICHRA the 401K for Group Health Benefits

Fed-up with group health insurance? ICHRA is the new way to offer great health benefits and avoid ACA penalties, SHRM calls it the 401K for group health benefits.  In 2020 the Department of Labor, HHS and IRS changed the rules for employer health benefits. They changed the Affordable Care Act mandates and penalties for every

Read More »


Financial Leadership Workshop

MARCH 28TH-31ST 2022



Strategic CFO™ Financial Leadership Workshop
The Art of the CFO®


September 12-15th 2022