Debt to Equity

Debt to equity is a solvency ratio that, like debt to assets, is a way to determine the relative contributions to total funding attributable to debt or equity. Since total assets is equal to total liabilities plus total equity, the debt to equity ratios are alternate ways to convey the same information.

Like debt to assets, there are also several variations that are chosen to measure various aspects.

  • Total liabilities/Total equity
  • (Short-term debt + Long-term debt)/Total equity
  • (Short-term debt + Long-term debt)/(Short-term debt + Long-term debt + Total equity)

This last ratio is called the capitalization ratio, and it shows how much of a company’s permanent capital base is funded by debt. For Plantronics in 2006:

Short-term debt 22,043
Long-term debt 1,453
Total debt 23,496
Equity 435,621
Total capitalization 459,117
Debt/Capitalization 5.1%
For more information, see all articles on: Financial Statement Analysis, Fundamental Analysis, Investing in Stocks, Ratio Analysis, Security Selection

See also:
  • Analyzing Convertible Debt
  • Tobin’s q
  • Debt Covenants
  • Solvency Ratios
  • Extinguishing Debt
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