The debt-to-equity ratio (debt-to-equity or D/E) is a ratio to measure the financial health of a company. This ratio reflects the company's ability to survive without regular cash inflows, the effectiveness of business practices, and the level of risk and stability, or a combination of all of these factors. Like other ratios, this ratio can be expressed in terms of decimal numbers or percentages.
Step
Part 1 of 2: Gathering Required Financial Information
Step 1. Find publicly published company financial data
Companies that go public are required to report their financial information to the public. There are many sources for obtaining the financial statements of a public company.
- If you have a broker account, start there. Most online brokerage services allow you to access a company's financial statements by simply searching for the stock symbol.
- If you don't have a brokerage account, go to a financial site like Yahoo! Finance. Just type in the company's stock symbol in the search field on the site's page, click "Search Finance" and various specific information about the company (including financial information) will be displayed on the page.
Step 2. Determine the amount of long-term debt the company has in the form of bonds, loans, and various lines of credit
This information can be found on the balance sheet of the company.
- The amount owed by the company is under the label "Liability."
- The total amount of debt is equal to the total liabilities of the company. You don't have to worry about listing individual accounts in the liability section.
Step 3. Determine the amount of equity the company has
Like liabilities, this information is on the balance sheet.
- The company's equity is usually located at the bottom of the balance sheet, under the label "Owner's Equity" or "Shareholder's Equity".
- You can ignore the accounts listed in the equity section. What is needed is the company's total equity figure.
Part 2 of 2: Calculating the Company's Debt/Equity Ratio
Step 1. Simplify the debt-to-equity ratio to the ratio to the lowest divisor
For example, a company with $1 million in liabilities and $2 million in equity would have a 1:2 ratio. That is, there is Rp. 1 creditor's investment for every Rp. 2 of shareholder's investment.
Step 2. Simplify the debt-to-equity ratio again to a percentage by dividing total liabilities by total equity and multiplying by 100
For example, a company with liabilities of Rp. 1 million and equity of Rp. 2 million will have a ratio of 50%. That is, there is Rp. 1 creditor's investment for every Rp. 2 of shareholder's investment.
Step 3. Compare the D/E ratio of the company under study with other similar companies
In general, healthy companies have a D/E ratio close to 1:1 or 100%.
