Plain definition
Debt-to-equity compares a defined debt balance with equity at a stated date. It describes financing mix, but the definition must say whether leases, shareholder loans, and preferred instruments are included.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A business has defined debt and equity, so debt-to-equity is 1.5. A proposed shareholder loan would lift the ratio to 2.0 if classified as debt. Management checks the loan agreement and lender covenants before treating it as flexible funding.
Why it matters
Financing mix affects resilience, covenant headroom, and the owners’ exposure to loss. A clear definition prevents a shareholder loan or lease from disappearing from the leverage decision.
Practical consequence
State the debt and equity definitions, date, and any covenant basis. Interpret the ratio with repayment dates, interest cost, cash flow, and asset risk; the same ratio can mean different risk in different businesses.