Divide a clearly defined debt or liabilities measure by equity, keeping both amounts on the same date and value basis.
State the numerator before comparing leverage
Debt-to-equity divides a debt or liabilities measure by shareholders’ equity. The SEC’s broad financial-statement ratio uses total liabilities and book shareholders’ equity. Corporate-finance analysis often uses interest-bearing debt and may compare it with book or market equity. Enter the scope you intend, keep numerator and equity on the same date and value basis, and state that definition when comparing companies.
$400,000 of debt and $600,000 of equity is 0.667×; the entered amounts split 40% and 60%. CFI’s $50 million debt and $120 million equity is 0.417×. $200 of debt on $100 of equity is 2×.
What this ratio leaves out
Equity must be positive. Negative book equity, preferred stock, leases versus debt classification, net debt, and industry target ranges stay outside this two-number identity. Only market-value interest-bearing debt and market equity align with WACC weights; total liabilities divided by book equity is a different scope.
Frequently asked questions
Interest-bearing debt or total liabilities?
Choose one scope and label it. The SEC’s broad ratio uses total liabilities over book shareholders’ equity; capital-structure analysis often uses interest-bearing debt. Do not compare ratios built from different definitions.
Can debt be zero?
Yes. Then debt-to-equity is 0× and the equity share of the entered total is 100%.
How is this different from WACC?
WACC requires market-value weights for interest-bearing debt and equity. This page also permits a broader total-liabilities/book-equity ratio, which should not be treated as those WACC weights.
How is this different from DTI?
Household debt-to-income divides monthly debt payments by income. Debt-to-equity divides a firm’s chosen debt or liabilities measure by equity.