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Finance GlossaryDebt To Equity Ratio
Debt To Equity Ratio
Definition of Debt To Equity Ratio
The debt to equity ratio is a measure of a company’s financial health that’s calculated by dividing liabilities from shareholder equity.
Debt to equity ratio: Total liabilities / Shareholder equity
A high debt to equity ratio means that a company is taking on more debt to run its business. A low debt to equity ratio means that a company is operating at low debt.
That’s why investors calculate the D/E ratio to understand a company’s ability to operate without debt. Generally, D/E is used for comparative analysis within sectors, not across industries because the ideal debt ratio may vary.
Debt to equity ratio: Total liabilities / Shareholder equity
A high debt to equity ratio means that a company is taking on more debt to run its business. A low debt to equity ratio means that a company is operating at low debt.
That’s why investors calculate the D/E ratio to understand a company’s ability to operate without debt. Generally, D/E is used for comparative analysis within sectors, not across industries because the ideal debt ratio may vary.
Related Terms
Yield
Yield is the income generated from an investment, expressed as a percentage of its price or value. For example, a bond paying ₹50 annually on a ₹1,000 investment offers a 5% yield, helping investors compare income potential across different assets like bonds, dividends, or fixed deposits.
Window Dressing
Window dressing is a strategy used by fund managers near reporting periods to improve the appearance of portfolio performance. This may involve selling underperforming stocks and buying well-known or strong-performing ones before disclosures, making the portfolio look more attractive to investors without changing long-term strategy.
VIX (Volatility Index)
The VIX, often called the “fear index,” measures market expectations of near-term volatility based on options pricing. When the VIX rises sharply, it indicates increased investor anxiety, such as during market crashes or geopolitical events, while a low VIX suggests stable and confident market conditions.
Quick Ratio
The Quick Ratio, also known as the acid-test ratio, measures a company’s ability to meet short-term liabilities using its most liquid assets. It is calculated as (Current Assets - Inventory) divided by Current Liabilities, excluding less liquid inventory from current assets. A Quick Ratio above 1 indicates a company's strong liquidity to cover obligations without selling inventory, helping investors evaluate financial stability and short-term solvency.
Dividend Payout Ratio
The Dividend Payout Ratio refers to dividends paid to shareholders as a percentage of the net income or Earnings Per Share (EPS) of a company. The formula to calculate dividend payout ratio is:
DPR = Dividend / Net income
or
DPR = Dividend / Earnings Per Share
A higher dividend payout ratio means that a company is redistributing a chunk of its profits to shareholders, which generally implies that the company is well-established.
DPR = Dividend / Net income
or
DPR = Dividend / Earnings Per Share
A higher dividend payout ratio means that a company is redistributing a chunk of its profits to shareholders, which generally implies that the company is well-established.
Preferred Stock
Preferred stock is a class of ownership in a corporation that has a higher claim on assets and earnings than common stock. Preferred stockholders receive dividends, and they must be paid out prior to any dividends being distributed to common stockholders. Unlike common stock, preferred stock does not come with voting rights. It is a hybrid security, with elements of both equity (ownership) and debt (fixed payments of dividends).
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