Debt-to-Equity Ratio

The debt-to-equity (D/E) ratio (sometimes called ‘risk’, ‘gearing’ or ‘leverage’) is another indicator of both corporate structure and measure of corporate financial risks. It indicates the relative proportion of shareholders' equity and debt used to finance a company's assets.

The two components are usually taken at book value, but the ratio may also be calculated using market values for both, if the company's debt and equity are publicly traded, or using a combination of book value for debt and market value for equity financially. In this case, the latter approach is far more accurate, of course.

As I stated above on numerous occasions, debt-to-equity ratio – as the whole corporate structure – needs to be optimized to come up with an optimal WACC, ROIC, economic profit and financial value.