September 24, 2020

The Definition Of Debt To Equity Ratio And How To Calculate It

A company is said to be healthy not only from sales value or the quality of its human resources. But it can be measured from an internal financial perspective. One of them is by measuring the ratio of debt to capital or by a term better known as debt to equity ratio. Meanwhile, before we continue, if you need a reliable bookkeeper, we suggest you call Richard Darcy Gold Coast Bookkeeper.

Debt to Equity Ratio (ratio of debt to capital) or what can be abbreviated as DER is the ratio of debt to equity. It can also be called the capital debt ratio. The definition of Debt to Equity Ratio (DER) is a financial ratio that compares the amount of debt with equity. Equity and the amount of debt used for company operations must be proportional. Debt to Equity Ratio is also often known as the leverage ratio or leverage ratio. What is meant by the leverage ratio is the ratio used to take measurements of an investment in the company.

The debt to equity ratio is the main financial ratio in a company. This is because the Debt to Equity Ratio is used to measure a company’s financial position.

How to calculate the Debt to Equity Ratio requires a separate formula. The formula is:

Debt to Equity Ratio (DER) = Total Debt: Equity

With notes:

1. Debt or so-called liability is an obligation that must be paid by the company in cash to the creditor within a certain period. Judging from the repayment period, debt is divided into current liabilities, long-term liabilities, and other obligations.

2. Equity or equity is the company’s ownership of assets or assets of the company which constitutes net assets. Equity consists of the company’s owner’s deposit and the remaining retained earnings.

Current liabilities or current debts are liabilities that are short-term in nature and still tend to be considered normal. Usually, good debt is corporate debt that concerns about the company’s short-term operations. For example; debt to suppliers, payment obligations, or purchase debt in order to meet production needs.

Long-term obligations are a type of debt that is dangerous for the company and better avoided by the company. Long-term debt is usually higher nominal and has an interest.