Calculate the debt-to-equity ratio to understand the financial leverage of a company. This ratio is a key indicator of financial risk and capital structure.
The Debt-to-Equity (D/E) Ratio is a financial leverage ratio that measures the proportion of debt a company has in relation to its equity. It is used to assess the financial risk of a company.
Debt-to-Equity Ratio Formula:
D/E Ratio = Total Debt / Total Equity
Let’s say a company has the following financials:
Using the formula, the Debt-to-Equity Ratio is:
D/E Ratio = $500,000 / $1,000,000 = 0.5
This means that for every dollar of equity, the company has 50 cents of debt.
The Debt-to-Equity Ratio provides insights into the financial structure of a company:
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