Also known as gearing or leverage, this is the relationship between a firm’s total interest-bearing debt and its total equity, expressed as balance sheet debt plus equity (shareholders’ funds).

So for example if a firm has £100m of interest-bearing debt and £400m of equity the debt to equity ratio is (£100m/(£100m+£400m)), or 20%. The higher this number the riskier the firm although it also means it will make a higher return for shareholders when times are good. For that reason high debt to equity firms generally have more volatile share prices than their less indebted peers.