Which formula is used to calculate the debt to equity ratio?

The debt to equity ratio is a financial metric used to evaluate a company's financial leverage and the proportion of debt financing relative to equity financing. This ratio specifically examines how much debt a company has for each dollar of equity.

The correct formula for calculating the debt to equity ratio is total debt divided by total equity. This relationship provides insight into a company's capital structure, indicating how much of the company is financed by creditors versus shareholders. A higher ratio suggests more risk, as it indicates that a greater proportion of the company’s financing is through debt.

While other options may include elements of financial ratios, they do not accurately reflect the debt to equity ratio:

• Total assets/equity would give a sense of the company's overall financial leverage but not specifically the relationship of debt to equity.

• Total debt/assets calculates the proportion of a company's assets that are financed by debt, which is a different concept known as the debt ratio.

• Total liabilities/equity resembles the correct formula but uses liabilities instead of total debt, which may include other non-debt obligations, thus not accurately representing the capital structure in terms of just financing.

This is why total debt/equity is the correct formula for determining the debt to equity ratio, as it effectively captures the intended relationship between