Debt to Equity Ratio

Debt to Equity Ratio

One of the leading indicators in financial literature of a company’s health is the debt to equity ratio. This ratio is simply expressed as:

Debt to Equity Ratio=Total Liabilities/Total Assets - Total Liabilities

According to Heiserman debt to equity ratios of greater than 75% should be avoided, because the leverage structure increases the likelihood of the company getting bankrupt. I personally am not too much of a proponent of this ratio because a company with a high level of debt to equity can have enough assets to be able to cover up the debt. For example supposing a company has assets worth 100 million USD and debt worth 50 million USD. This would create a debt to equity ratio of 100%. But the important point is that the assets are still twice as large as the liabilities and if a company is trading at a low enough price it will produce a low price to book stock which in many cases is a value investment (especially if many of the assets are liquid investments).