Question

A company has $14,000 in liabilities and $15,000 in equity. Calculate the company's debt to equity ratio as a percentage.

Answer 1

The required debt-equity ratio is 14:15

Solution:

Given:

Liabilities of the company = $14000

Equity of the company = $15000

To calculate: The debt-equity ratio

Here, the liabilities are included in the debt of the company. The debt-to-equity (D/E) ratio is calculated by dividing a company's total liabilities by its shareholder equity. Therefore, the debt equity ratio is as follows,

$\text { Debt Equity ratio }=\frac{\text { Debt }}{\text { Equity }}=\frac{14000}{15000}=\frac{14}{15}$

$\text { Debt Equity ratio }=\frac{14}{15} \rightarrow 14: 15$

The debt-equity ratio reflects the ability of shareholder equity to cover all outstanding debts in the event of a business downturn.