Debt to Equity Law and Legal Definition

Debt to Equity measures the risk of the firm’s capital structure in terms of amounts of capital contributed by creditors and that contributed by owners. It expresses the protection provided by owners for the creditors. While using debt implies risk, it also introduces the potential for increased benefits to the firm’s owners. When debt is used successfully the returns to shareholders are magnified through financial leverage. Depending on the industry, different ratios are acceptable. The company should be compared to the industry, but, generally, a 3:1 ratio is a general benchmark. Should a company have debt-to-equity ratio that exceeds this number; it will be a major impediment to obtaining additional financing.