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:
“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)
“The formula for achieving a successful relationship is simple: you should treat all disasters as if they were trivialities but never treat a triviality as if it were a disaster.”
—Quentin Crisp (b. 1908)
“But suppose, asks the student of the professor, we follow all your structural rules for writing, what about that “something else” that brings the book alive? What is the formula for that? The formula for that is not included in the curriculum.”
—Fannie Hurst (1889–1968)