Debt-to-equity ratio

The debt-to-equity ratio (gjeldsgrad) is a financial key figure that provides information about the relationship between a business's debt and its equity. The debt-to-equity ratio measures how large a proportion of the business's financing comes from debt financing as against equity financing.

How it is calculated

The debt-to-equity ratio is calculated by dividing total liabilities by equity, and then multiplying by 100 to express it as a percentage. The formula is as follows:

Debt-to-equity ratio = (Total liabilities / Equity) × 100

The ratio is often given as a plain multiple as well, without multiplying by 100. A debt-to-equity ratio of 150% and one of 1.5 therefore mean the same thing: the debt is one and a half times the equity.

What is it used for?

The debt-to-equity ratio is used to assess how much of the business's financing comes from debt financing as against equity financing. It gives insight into the business's capital structure and level of risk.

Tips for improving the debt-to-equity ratio

1. Reduce debt. Identify opportunities to reduce the debt, for example by paying down loans or restructuring debt in order to reduce total liabilities.
2. Increase equity. Add more equity to the business by injecting more capital from the owners or shareholders. This helps to increase the equity ratio and thereby reduce the debt-to-equity ratio.
3. Optimise the capital structure. Consider the balance between debt and equity in order to achieve an optimal capital structure that suits the business's risk profile and needs.
4. Improve profitability. Improve the business's profitability by increasing revenue, reducing costs and improving operational efficiency. This helps to generate more profit and strengthen the equity.
5. Restructure debt. Consider the possibility of debt restructuring in order to improve the debt profile and the terms of the debt, for example by refinancing loans at a lower interest rate or over a longer term.
6. Practise proper risk management. Consider the business's risk profile and make sure the level of debt is consistent with the business's ability to handle risk and meet future obligations.

By monitoring and managing the debt-to-equity ratio, the business can maintain a sound capital structure and ensure that it is able to handle its debt obligations sustainably. Read more about how the key figures in Capassa keep the debt-to-equity ratio up to date automatically.