Debt-to-equity ratio definition

The debt-to-equity ratio (debt/equity ratio) of a company is an indication of how highly leveraged (debt) it is relative to shareholder equity, which is the sum of invested capital and retained earnings (profits left to accumulate in the company). Calculating this ratio is a quick way to get a perspective on one of the important financial indicators of any business.

The debt-to-equity ratio is calculated from the balance sheet, by dividing total debt by shareholder equity. Debt includes interest-bearing liabilities on the balance sheet such as long term debt, capital leases and off-balance sheet debt such as operating leases and future obligations such as unfunded pensions and retiree health benefits. Equity components are identified above.

Producing an attractive debt-to-equity ratio is a challenge for many growing small businesses because they are likely to be highly leveraged, while simultaneously re-investing their profit potential back into the business instead of posting a larger profit, which negatively impacts the equity line on the balance sheet.