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The **Debt-to-Equity Ratio Calculator** is a vital tool for assessing a company’s financial leverage and stability. It allows you to model the relationship between a company’s liabilities and its shareholder financing. This versatile solver can determine the **Total Assets (A)**, **Total Debt (D)**, **Total Equity (E)**, or the **D/E Ratio (R)**. Simply enter any three of the four known variables and the calculator will solve for the missing one.
Debt-to-Equity Financial Solver
Debt-to-Equity Ratio Formula
The Debt-to-Equity (D/E) Ratio is the core calculation. However, all variables are fundamentally linked by the Balance Sheet Identity: **Assets = Debt + Equity**.
Core Ratio: Debt-to-Equity Ratio (R) = Total Debt / Total Equity
$$ R = \frac{D}{E} $$
\text{Solve for Total Debt (D): } $$ D = R \cdot E $$
\text{Solve for Total Equity (E): } $$ E = \frac{D}{R} $$
\text{Balance Sheet Identity (A): } $$ A = D + E $$
Formula Source: Investopedia: Debt-to-Equity Ratio
Variables
- A (Total Assets): The sum of all economic resources owned by the company (A = D + E). (In currency).
- D (Total Debt): The cumulative liabilities or obligations the company owes to external parties. (In currency).
- E (Total Equity): The capital invested by shareholders plus retained earnings. (In currency).
- R (D/E Ratio): A measure of financial leverage, calculated as the ratio of Debt to Equity. (As a dimensionless number).
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What is the Debt-to-Equity Ratio?
The Debt-to-Equity (D/E) Ratio is a metric used to evaluate a company’s financial leverage and risk exposure. It indicates how much debt a company is using to finance its assets relative to the amount of funding provided by shareholders (equity). A high D/E ratio suggests that a company is aggressively funding its growth through debt, which increases the risk for investors and creditors if the company faces a downturn.
Conversely, a low D/E ratio means a company relies primarily on equity financing, making it more financially stable but potentially slower-growing, as it may not be capitalizing on available debt financing for expansion. Ideal D/E ratios vary significantly by industry—for example, capital-intensive industries like utilities often have much higher acceptable ratios than technology companies. Investors use this ratio to compare the risk profile of companies within the same sector.
How to Calculate the D/E Ratio (Example)
A manufacturing company reports $\$400,000$ in Total Debt (D) and $\$600,000$ in Total Equity (E).
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Step 1: Identify Variables
Total Debt $(D) = \$400,000$. Total Equity $(E) = \$600,000$.
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Step 2: Apply the D/E Ratio Formula
$$ R = \frac{D}{E} = \frac{\$400,000}{\$600,000} $$
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Step 3: Determine the D/E Ratio (R)
The resulting D/E Ratio is $\mathbf{0.67}$. This means the company uses 67 cents of debt for every dollar of equity to finance its assets.
Frequently Asked Questions (FAQ)
There is no single “good” ratio. In general, a D/E ratio below 1.0 is often seen as favorable, meaning the company is primarily equity-funded. However, ratios between 1.0 and 2.0 are common. The acceptability of the ratio is highly dependent on the industry’s debt appetite and stability.
A negative D/E Ratio occurs when a company has **Negative Equity**, meaning its Total Liabilities (Debt) exceed its Total Assets, resulting in a negative shareholder equity balance. This is often a strong indicator of severe financial distress or potential insolvency.
The D/E Ratio compares Debt to *Equity*. The Debt-to-Assets Ratio compares Debt to *Total Assets* (D / A). Both measure leverage, but D/E focuses on the structure of financing, while D/A focuses on the percentage of assets funded by debt.
If Total Equity (E) is zero or negative, the D/E Ratio calculation requires division by zero or a negative number. This is mathematically invalid or results in a highly volatile, uninterpretable ratio, which is why the calculator requires positive equity when solving for R.