Debt to Equity Ratio

How to use debt to equity ratio

Why do investors use the debt to shareholders equity ratio in their analysis

It shows how much debt the company uses to finance their operations. Shareholders equity is whats left over when you subtract total liabilities from total assets. It's another way to meassure how much of  is financed with debt or own resources.

The three steps every investor should look at:

Things to be aware of

How to calculate debt to equity ratio

Real life example

A real life example of Tesla. You need the following data to determine equity ratio:

Debt to equity measures the total debt versus the total shareholders equity. While the total debts to total assets ratio uses total assets, the debt to equity ratio looks at the total equity of shareholders. Where equity of shareholders are:

You can find the shareholders' equity in the balance sheet. A ratio between 0,5 and 1,5 is preferred. If the ratio is above 1.5,  that would indicate creditors have significantly more stake (debt) in the company than the shareholders. In other words, the company is using a lot of debt to finance their operations.

Not all debt is equally risky. Meaning you can adjust the ratio by including or excluding certain amounts of debt. Short term debts are less risky because they have to be paid back within one year anyway. It’s much easier to plan one year ahead versus five or ten years.