The debt-to-equity ratio formula is a financial metric that measures the relative proportion of debt and equity used to finance a company’s assets. It is calculated as total debt divided by total equity. A high debt-to-equity ratio indicates that a company is relying more heavily on debt financing, which can increase its financial risk. A low debt-to-equity ratio, on the other hand, indicates that a company is relying more heavily on equity financing, which can reduce its financial risk.
The debt-to-equity ratio is an important financial metric because it provides insights into a company’s financial leverage and risk profile. Lenders and investors often use the debt-to-equity ratio to assess a company’s creditworthiness and investment potential. A high debt-to-equity ratio can make it more difficult for a company to obtain financing and can also increase its cost of capital. A low debt-to-equity ratio, on the other hand, can make it easier for a company to obtain financing and can also reduce its cost of capital.