What is the formula for the debt-to-equity ratio and what does it indicate?

What is the formula for the debt-to-equity ratio and what does it indicate?

• A. Total assets ÷ Total equity
• B. Total liabilities ÷ Total equity
• C. Total assets ÷ Total liabilities
• D. Equity ÷ Liabilities

Answer: (B)

The debt-to-equity ratio measures leverage by comparing what a company owes to what the owners have invested. It is calculated by dividing Total Liabilities by Total Equity. This shows how heavily the company is financed with debt relative to equity, indicating financial risk and the burden on earnings from interest and obligations. A higher ratio means more debt per dollar of equity, signaling greater leverage and potential risk; a lower ratio means less debt and a bigger equity cushion. For example, if liabilities are 500,000 and equity is 1,000,000, the ratio is 0.5, meaning debt is half as large as equity. This formula uses liabilities, not assets, so asset levels don’t appear in the numerator.

The debt-to-equity ratio measures leverage by comparing what a company owes to what the owners have invested. It is calculated by dividing Total Liabilities by Total Equity. This shows how heavily the company is financed with debt relative to equity, indicating financial risk and the burden on earnings from interest and obligations. A higher ratio means more debt per dollar of equity, signaling greater leverage and potential risk; a lower ratio means less debt and a bigger equity cushion. For example, if liabilities are 500,000 and equity is 1,000,000, the ratio is 0.5, meaning debt is half as large as equity. This formula uses liabilities, not assets, so asset levels don’t appear in the numerator.