Financial Debt to Total Equity

Financial Debt to Total Equity is the amount of financial debt a company has over its total equity (Market Cap + Preferred Stock).

Financial Debt are liabilities on the balance sheet that are non-operational (ie. not contingent for the daily operation of the firm). Total Equity separates Equity into two components, the valuation of the common shares outstanding (Market Capitalization) and Preferred Stock.

This ratio represents the amount of financial debt as a percentage of the equity component. Most solvency ratios compute equity as shareholder's equity from the balance sheet, however, this does not take into account the current market valuation/price on secondary markets (NASDAQ/NYSE, etc). As a result, shareholder's equity can significantly diverge from its carrying value and market value.

By using market value of common equity and the total preferred stock, this effectively allows investors to ask and answer the question - What is the amount of a company's financial debt relative to its current market valuation of equity?

Ratios equal to one indicate financial debt and total equity are equal; lower ratios indicate a lower amount of financial debt to equity. During bull (bear) markets, these ratios will often appear lower (higher) as rising (falling) markets lift market capitalization up (down).

Financial Debt to Total Equity = Financial Debt / (Market Capitalization + Preferred Stock).