Debt-to-equity ratio
The debt-to-equity ratio is total debt divided by total shareholders' equity, expressing how much of a firm's financing comes from creditors relative to owners; a rising ratio signals increasing financial risk.
FrameworkRatio analysis
See it move
A company carries €6 million of interest-bearing debt and €4 million of shareholders' equity, together financing €10 million of assets. Debt-to-equity ratio = €6.0m ÷ €4.0m = 1.5, meaning creditors have contributed €1.50 for every €1.00 shareholders have invested — creditors now have more at stake than the owners.
The formula
Variables
- Total debt (interest-bearing borrowings) (€)
- Total shareholders' equity (€)
A ratio above 1.0 means creditors have more at stake than shareholders; a rising ratio signals increasing financial risk.
Check yourself
Company P has total debt of €4,000,000 and shareholders' equity of €8,000,000. Company Q has total debt of €9,000,000 and shareholders' equity of €6,000,000. Both operate in the same industry. Which statement correctly interprets their relative financial risk?