How is the debt to equity ratio calculated?



Q27. Debt to equity ratio
How is the debt to equity ratio calculated?

A27.
Debt to equity ratio
= Total liabilities / Total stockholders’ equity

[Entity 27-a]
Total liabilities = $720,000
Total stockholders’ equity = $800,000
Debt to equity ratio
= $720,000 / $800,000 = 0.9

[Entity 27-b]
Total liabilities = $780,000
Total stockholders’ equity = $650,000
Debt to equity ratio
= $780,000 / $650,000 = 1.2

[Note]
Debt to equity ratio is lower for Entity 27-a than for Entity 27-b.
Thus Entity 27-a is better prepared in long-term solvency than Entity 27-b.

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