Formula
- D/E = Debt(liabilities)/equity
(Sometimes only interest-bearing long-term debt is used instead of total liabilities in the calculation)
A similar ratio is debt-to-capital (D/C), where capital is the sum of debt and equity:
- D/C = total liabilities / total capital = debt / (debt + equity)
The relationship between D/E and D/C is:
- D/C = D/(D+E) = D/E / (1 + D/E)
The debt-to-total assets (D/A) is defined as
- D/A = total liabilities / total assets = debt / (debt + equity + non-financial liabilities)
It is a problematic measure of leverage, because an increase in non-financial liabilities reduces this ratio. Nevertheless, it is in common use.
In the financial industry (particularly banking), a similar concept is equity to total assets (or equity to risk-weighted assets), otherwise known as capital adequacy.
Read more about this topic: Debt-to-equity Ratio
Famous quotes containing the word formula:
“So, if we must give a general formula applicable to all kinds of soul, we must describe it as the first actuality [entelechy] of a natural organized body.”
—Aristotle (384–323 B.C.)
“I cannot give you the formula for success, but I can give you the formula for failure—which is: Try to please everybody.”
—Herbert B. Swope (1882–1958)
“Every formula which expresses a law of nature is a hymn of praise to God.”
—Maria Mitchell (1818–1889)