This capital structure ratio indicates what proportion of equity and debt is used to finance the assets : it is a measure of the extent to which a firm's capital is provided by owners or lenders.

  Calculation rule
Total debt/Equity = [Long term debt + Short term debt] / Equity

A high debt ratio indicates that creditors have financed a substantial portion of the business, more than the owners. This is often a red flag to potential lenders since it increases the possibility of bankruptcy if net sales are not enough to meet monthly debt and interest payments.

Average debt/equity ratios vary by industry, with extremes ranging from 120% for European airlines to 25% for European cosmetics companies
(source: insead).

Financial Leverage

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