Because the ratio can be distorted by retained earnings or losses, intangible assets, and pension plan adjustments, further research is usually needed to understand to what extent a company relies on debt. Thus, shareholders’ equity is equal to the total assets minus the standard chart of accounts total liabilities. Company B has $100,000 in debentures, long term liabilities worth $500,000 and $50,000 in short term liabilities. At the same time, the company has $250,000 in shareholder equity, $60,000 in reserves and surplus, and $10,000 in fictitious assets.
- The D/E ratio can assist a shareholder, financial officer, or other business stakeholders in gaining a greater understanding of how much risk a company is taking within its capital structure.
- The debt-to-equity (D/E) ratio is a metric that provides insight into a company’s use of debt.
- As with any ratio, the debt-to-equity ratio offers more meaning and insight when compared to the same calculation for different historical financial periods.