Analyze financial leverage and solvency for businesses and investments.
Include current and long-term debt.
Total assets minus total liabilities.
Calculated Debt to Equity Ratio:
0.00
Understanding the Debt to Equity (D/E) Ratio
The Debt to Equity (D/E) ratio is a vital financial metric used to evaluate a company's financial leverage. It reveals the proportion of relative shareholder equity and debt used to finance a company's assets. Closely watched by investors and lenders, this ratio indicates the extent to which a company is taking on debt as a means of leveraging its assets.
How to Calculate D/E Ratio
The calculation is straightforward: divide the total liabilities by the total shareholders' equity. The formula is expressed as:
D/E Ratio = Total Liabilities / Total Shareholders' Equity
Interpreting the Results
Low Ratio (Below 1.0): Indicates a more conservative approach with less reliance on debt. This is generally seen as lower risk.
Moderate Ratio (1.0 – 2.0): Common in many industries, suggesting a balanced mix of debt and equity financing.
High Ratio (Above 2.0): Suggests aggressive financing through debt. While this can result in higher earnings, it poses a greater risk if interest rates rise or earnings fluctuate.
Real-World Example
Imagine "TechFlow Solutions" has $1,200,000 in total liabilities (including bank loans and accounts payable) and $800,000 in total shareholders' equity.
Calculation: $1,200,000 / $800,000 = 1.50
A D/E ratio of 1.50 means that for every dollar of equity, the company has $1.50 in debt. This level is typical for capital-intensive industries but might be considered high for a software service company.
function calculateDERatio() {
var liabilities = parseFloat(document.getElementById('totalLiabilities').value);
var equity = parseFloat(document.getElementById('totalEquity').value);
var resultsArea = document.getElementById('resultsArea');
var ratioDisplay = document.getElementById('ratioDisplay');
var interpretation = document.getElementById('interpretation');
var breakdown = document.getElementById('breakdown');
if (isNaN(liabilities) || isNaN(equity) || equity === 0) {
alert("Please enter valid numerical values. Note that Shareholders' Equity cannot be zero.");
return;
}
var deRatio = liabilities / equity;
var formattedRatio = deRatio.toFixed(2);
resultsArea.style.display = 'block';
ratioDisplay.innerHTML = formattedRatio;
var status = "";
var color = "";
var desc = "";
if (deRatio = 1 && deRatio <= 2) {
status = "Moderate Leverage";
color = "#ffc107";
desc = "The company has a balanced mix of debt and equity. This is typical for established firms in many sectors.";
} else {
status = "High Leverage (Aggressive)";
color = "#dc3545";
desc = "The company is heavily reliant on debt. While this can boost growth, it increases vulnerability to interest rate hikes and economic downturns.";
}
interpretation.innerHTML = "Financial Status: " + status + "";
breakdown.innerHTML = "This means for every $1.00 of equity owned by shareholders, the company owes $" + formattedRatio + " in liabilities. " + desc;
resultsArea.scrollIntoView({ behavior: 'smooth', block: 'nearest' });
}