Capital structure ratios: compare debt and equity funding

Capital structure ratios compare the debt, equity and other funding behind a company's assets. Read debt-to-equity, debt-to-capital and equity-to-assets together: the first two use a debt-and-equity funding base, while the third uses the whole balance sheet. Their interpretation depends on exactly which liabilities count as debt.

Define the funding balances once

The CFA Institute's financial analysis reading groups debt-to-equity and debt-to-capital among solvency ratios. They help a finance team describe borrowing relative to the capital supporting it. They are not substitutes for a maturity schedule or a cash-flow review.

For the example below, debt means short-term plus long-term interest-bearing borrowings, measured at their balance-sheet carrying amounts. Equity means total book shareholders' equity. Capital means that debt plus equity. There are no lease liabilities, preferred shares or noncontrolling interests in the example.

In a real workbook, document how those balances are treated. For example, a policy that includes finance lease liabilities in debt must include them at every comparison date. A lender's covenant definition may adjust debt, equity or cash; calculate that version separately from the management ratio rather than relabeling one as the other.

Debt terminology is not universal. The SEC's financial statements guide illustrates debt-to-equity using total liabilities divided by shareholders' equity. This article uses interest-bearing debt instead and keeps all other liabilities in a visible reconciliation. The SEC guide also states the balance-sheet identity: assets equal liabilities plus shareholders' equity.

Read the ratios as a group

Debt-to-equity = Interest-bearing debt / Book equity

Debt-to-capital = Interest-bearing debt / (Interest-bearing debt + Book equity)

Equity-to-assets = Book equity / Total assets

The separate debt-to-equity ratio, debt-to-capital ratio and equity ratio pages own the individual calculations. Here the task is to understand what their combined movement says about the funding mix.

Debt-to-equity is usually presented as times; debt-to-capital and equity-to-assets are usually percentages. The first two are different expressions of the same relationship when their debt and equity definitions match. Equity-to-assets adds information because its denominator also reflects assets funded by trade payables, accruals and other liabilities.

Prepare a comparable balance-sheet export

Use a balance-sheet workbook with account, entity, reporting date, currency, carrying amount and a funding classification. Keep separate classes for interest-bearing debt, other liabilities and equity. Preserve current and long-term debt categories so a current reclassification does not look like a new borrowing.

The treasury schedule should support debt balances, while the equity rollforward should support share capital, retained earnings and other equity accounts. Tie both to the ledger. Use the same consolidation scope for all periods, including consistent treatment of intercompany funding and eliminations.

Use balances at the same reporting date in each ratio. These are funding snapshots; a full year's income statement is not required for the calculations. If management also wants average leverage over a period, label that separate averaging convention clearly.

A worked example: more borrowing, unchanged mix

A US manufacturer compares its balance sheets at December 31, 2025 and September 30, 2026. All monetary amounts are USD; other liabilities consist only of the trade payables and operating accruals shown.

Ratios are rounded to two decimals for times and one decimal for percentages. Borrowing rose by $1,000,000, yet the mix ratios stayed unchanged because equity and other liabilities grew proportionately. A review that looks only at stable percentages would miss the larger dollar obligation.

Reconcile all funding to assets

The September balance sheet must satisfy:

Assets = Interest-bearing debt + Other liabilities + Equity

$5,000,000 + $2,500,000 + $7,500,000 = $15,000,000. Debt plus equity is only $12,500,000; the remaining $2,500,000 is funded by other liabilities. That is why equity is 60.0% of debt-and-equity capital, calculated as $7,500,000 / $12,500,000, but only 50.0% of assets.

As a cross-check, divide all funding classes by total assets. Debt is 33.3%, other liabilities are 16.7%, and equity is 50.0%, totaling 100.0% after the displayed rounding. Do not expect debt-to-capital plus equity-to-assets to sum to 100.0%; they use different denominators.

The total-liabilities-to-equity version would be $7,500,000 / $7,500,000 = 1.00 times, compared with the interest-bearing debt-to-equity figure of 0.67. That gap is definitional, not an arithmetic error.

Test a funding action before describing it

Suppose treasury repays $1,000,000 of September debt with cash. Equity and other liabilities stay unchanged. The pro forma balances and ratios become:

The balance check remains $4,000,000 + $2,500,000 + $7,500,000 = $14,000,000. Leverage has fallen under these definitions, but so has cash. Treasury must check liquidity and upcoming payments before deciding whether the repayment improves the overall funding position. Working capital ratios address that separate short-term balance question.

Where it goes wrong

• Treating all liabilities as borrowings. Either convention can be labeled and reconciled, but mixing them destroys comparisons.
• Changing the debt scope. Adding leases or excluding current maturities in only one period can create a false trend. Keep the classification bridge visible.
• Ignoring equity movements. Retained losses, dividends, repurchases or new contributions can move the ratios without a new loan. Use the equity rollforward to explain the change.
• Ranking negative equity mechanically. A negative or near-zero equity denominator makes ordinary leverage comparisons unreliable. Report the actual deficit and funding balances.
• Calling stable ratios stable risk. Larger debt balances, closer maturities or different interest terms may matter even when the mix is unchanged. Attach those facts to the funding discussion.

Compare your funding mix in Covirage

Bring a balance-sheet workbook and supporting debt and equity schedules, with the debt convention identified. Covirage maps the columns; its tools compute and check the funding ratios and balance reconciliation, and the external AI model explains the changes with every figure traced to its rows. Create a free Covirage account, which takes about a minute, then set up your business and bring a sample of your own data.

See FP&A reporting for the supporting finance workflow.