Legal Definitions - debt-to-equity ratio

The debt-to-equity ratio is a financial metric used to evaluate a company's capital structure. It is calculated by dividing a company's long-term debt by its owners' equity. This ratio helps investors and analysts understand how much debt a company is using to finance its operations compared to the amount of equity it has.

For example, if a company has $1 million in long-term debt and $2 million in owners' equity, its debt-to-equity ratio would be 0.5. This means that the company has half as much debt as equity.

A high debt-to-equity ratio can indicate that a company is relying heavily on debt to finance its operations, which can be risky if the company is unable to make its debt payments. On the other hand, a low debt-to-equity ratio can indicate that a company is using more equity to finance its operations, which can be less risky but may also limit the company's growth potential.