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A business is financed by either debt or equity (money invested by owners) or a combination of the two. The debt to equity ratio measures how much debt is used to finance the company in relation to the amount of equity used. Using debt financing is riskier for the company than using equity financing. As the proportion of debt financing goes up, the risk of the firm also goes up. That's why calculating this ratio is important, particularly to the owner's of the firm.
Take a look at the balance sheet. You can see that total debt and shareholder's equity are both highlighted. Those are the two figures that you need to calculate the debt to equity ratio. The calculation is: Total Debt (Liabilities)/Shareholder's Equity = _____ %
When you calculate the debt to equity ratio for 2007, you get:
$543 + $531/$2299 = 46.72%
This means that 46.72% of the firm's capital structure is debt and the remainder is supplied by investor capital. Like any other ratio, you need comparative data in order to know if this is good or bad. We don't have industry data but we can calculate the 2008 debt to equity ratio.
If you calculate the 2008 debt to equity ratio, the result is 38.48%. In 2008, the firm is using less debt to finance its operations which may be good. We have to do more advanced financial analysis, however, to know that for sure.
