What's Debt to Equity Ratio?

What's Debt to Equity Ratio?

The nitty gritty of debt to equity ratio and debt to equity investors.

By Marcia Smith

Comparing a total debt to equity

A debt to equity ratio is a way to compare a company’s total debt to total equity. This allows you to see whether the company relies more on creditor financing or investor financing. From this, you can get an idea of the company’s leverage position.

A debt to equity ratio of 1 would mean that shareholders and creditors have equal shares in the company, whereas a ratio of 0.5 would mean that shareholders own twice as many stakes in the company as creditors. So in this case, investors own 66.7% and creditors own 33.3% of company assets.

Each industry has different benchmarks for what is identified as a good debt to equity ratio, but generally the lower the number, the more financially stable the business is, as earnings are less reliant on the potential changes in interest payments.

You can work out your debt to equity ratio with the following formula: total liabilities ÷ total equity = debt to equity ratio.

Converting your debt into equity

Are you in debt but want your company to continue growing? Finding a debt-to-equity investor may be a way forward, but it could be a challenge. Naturally, investors are cautious about investing in businesses that are laden with a considerable amounts of debt. Therefore, attracting an investor who’ll invest in your company in exchange for equity in order to pay off debts can be tricky.

To attract a backer, you’re going to have to present a very strong business plan to ensure that they’re convinced that after the debt has been settled there’s a viable business. Crucially, you should also set out plans that make it clear the business will not get into bad debt again.