Definition:

Total Debt/Equity is a financial ratio that measures the relative proportion of a company's total debt to its shareholders' equity, indicating how much debt is used to finance the company relative to equity.

Examples

If a company has $200,000 in total debt and $400,000 in shareholders' equity, its Total Debt/Equity ratio would be 0.5. This means the company uses $0.50 of debt for every $1.00 of equity.

Formula:

Total Debt/Equity = Total Debt / Shareholders' Equity

How to use the metric:

This metric is used to assess a company's financial leverage and risk. A higher ratio suggests more debt relative to equity, which could indicate higher financial risk, while a lower ratio suggests less reliance on debt.

Limitations:

The Total Debt/Equity ratio does not consider the cost of debt or the company's ability to service its debt. It also varies significantly across industries, making cross-industry comparisons less meaningful.

Applies to:

This metric is particularly useful in capital-intensive industries such as manufacturing, utilities, and telecommunications, where companies often rely on debt financing.

Doesn't apply to:

It may not be as relevant for industries with low capital requirements, such as software or service-based industries, where companies typically have lower levels of debt.

Summary:

The Total Debt/Equity ratio is a key indicator of financial leverage, helping stakeholders understand how much debt a company uses relative to its equity. While useful, it should be considered alongside other financial metrics and industry norms to provide a comprehensive view of a company's financial health.