debt/equity ratio

Definition

A measure of a company's financial leverage. Debt/equity ratio is equal to long-term debt divided by common shareholders' equity. Typically the data from the prior fiscal year is used in the calculation. Investing in a company with a higher debt/equity ratio may be riskier, especially in times of rising interest rates, due to the additional interest that has to be paid out for the debt.

For example, if a company has long-term debt of $3,000 and shareholder's equity of $12,000, then the debt/equity ratio would be 3000 divided by 12000 = 0.25.
It is important to realize that if the ratio is greater than 1, the majority of assets are financed through debt. If it is smaller than 1, assets are primarily financed through equity.

Also see: List of Important Financial Ratios for Stock Analysis at InvestorGuide.com.

Use debt/equity ratio in a sentence

I wanted to know what the company's debt/equity ratio was because it was important for our well being in the company.

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After reviewing their debt/equity ratio they were able to see that they had too much debt and therefore had too little leverage with the banks.

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One of the covenants that a company must meet on their line of credit is a debt/equity ratio so it's important to monitor that throughout the year.

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unlevered beta debt to equity
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