Debt to equity ratio (D/E)

Debt to equity ratio is a measure of how much debt a company has relative to its equity, a higher leverage means higher risk and an opportunity for higher returns.

The debt to equity ratio is calculated as the company's liabilities (including provisions and the tax component of untaxed reserves) divided by adjusted equity.

Debt to equity ratio = adjusted debt / adjusted equity
Adjusted debt = liabilities + provisions + (corporation tax) * untaxed reserves
Adjusted equity = shareholders' equity + (1 - corporate tax) * untaxed reserves

Untaxed reserves may exist in annual reports to individual companies, untaxed reserves do not exist in consolidated financial statements because the division into an equity component and a debt component is made when the consolidated financial statements are prepared.

Return on equity increases if the debt to equity ratio increases, provided that the return on assets is greater than the average interest rate on debts in the company.