The debt-to-equity ratio can be computed with the following formula, using figures from your balance sheet:
Total Debt
Owners' (or Stockholder's) Equity |
|
The ratio of debt-to-owner's equity or net worth indicates the degree of financial leverage that you're using to enhance your return. A rising debt-to-equity ratio may signal that further increases in debt caused by purchases of inventory or fixed assets should be restrained.
Improving this ratio involves either paying off debt or increasing the amount of earnings retained in the business until after the balance sheet date. For instance, can expenses be deferred beyond the balance sheet date to increase your retained earnings? What about bonuses? Delaying any planned bonus expense serves to increase your retained earnings. As another example, you might think about repaying revolving debt (such as a line of credit) before the balance sheet date and borrowing again after the balance sheet date.