How to Calculate the Debt-to-Equity Ratio
Short answer. Divide total liabilities by total shareholders’ equity, both from the balance sheet. Liabilities of $600,000 against equity of $400,000 give a debt-to-equity ratio of 1.5, meaning the company owes $1.50 for every $1 of owners’ capital.
The formula
Debt-to-equity = Total liabilities / Shareholders' equity
Step by step
- Open the balance sheet. Use the same reporting date for both figures.
- Find total liabilities. Current plus long-term liabilities. Some analysts use only interest-bearing debt; state which version you use.
- Find shareholders' equity. Total assets minus total liabilities.
- Divide. Liabilities divided by equity gives the ratio.
Worked example
A company with $1,000,000 of assets and $600,000 of liabilities
- Equity = 1,000,000 - 600,000 = $400,000.
- Debt-to-equity = 600,000 / 400,000 = 1.5.
- Using only $350,000 of interest-bearing debt, the narrower ratio is 350,000 / 400,000 = 0.875.
Common mistakes
- Mixing definitions between companies (total liabilities vs interest-bearing debt).
- Comparing across industries: banks and utilities carry far more leverage than software firms.
- Ignoring negative equity, which makes the ratio meaningless.
Frequently asked questions
What is a good debt-to-equity ratio?
It depends on the industry. Many analysts treat values around 1 to 1.5 as moderate for non-financial companies, but capital-intensive industries run higher.
Can debt-to-equity be negative?
Yes, when equity is negative because liabilities exceed assets. It signals financial stress.
Is debt-to-equity the same as the debt ratio?
No. The debt ratio divides liabilities by total assets.
General education, not personal financial advice. Example figures are illustrative.