The debt-to-equity ratio is one of the most important solvency metrics in financial analysis. It quantifies the balance between creditor financing (debt) and owner financing (equity).
What Counts as Total Debt?
For the D/E ratio, total debt typically includes: - Short-term borrowings and current portion of long-term debt - Long-term debt (bonds, term loans) - Finance lease obligations
Some analysts use a broader "Total Liabilities" instead of just interest-bearing debt. The calculator uses interest-bearing debt for the standard D/E ratio.
Interpreting the Ratio
A D/E ratio of 1.0 means equal debt and equity funding. Below 1.0 = equity-heavy; above 1.0 = debt-heavy.
Neither is inherently better — the right ratio depends on: - Asset stability: Stable asset values support more debt (real estate, utilities) - Cash flow predictability: Predictable FCF supports debt service - Interest rate environment: Lower rates make debt more attractive - Growth stage: Early-stage companies often can't access debt and run near-zero D/E
The Equity Ratio
The equity ratio (Equity ÷ Total Assets) is often used alongside D/E:
A 40% equity ratio means 40 cents of every dollar of assets is funded by shareholders.