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.

ByHoang TruongUpdated July 2, 2026

FrameworkRatio analysis

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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.

Where it fits

SubjectFinancial AccountingCoreTopicFinancial Statement Analysis & RatiosCore

The formula

LaTeX

\text{D/E ratio} = \dfrac{\text{Total debt}}{\text{Total shareholders' equity}}

Variables

$D$: Total debt (interest-bearing borrowings) (€)
$E$: 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

PracticeCORE

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?

Select an answer to check your understanding.