Financing Leverage and Debt-to-Equity Ratios

The standard debt to equity ratio is

There are three issues with this calculation. First, Total Debt includes operating debt…operating liabilities generated in the course of business…which are not financing debt. Second, Total Debt is not reduced by debt assets (negative debt) to yield Net Debt. Third, Equity can include preferred equity which is effectively debt from the common shareholders’ perspective.

The same criticism applies to

The correct calculation for financing leverage is:

This is appropriate measure for equity analysis. The standard measure is appropriate for credit analysis where the issue is coverage of all debts.