The relationship between long-term funds provided by creditors and funds provided by owners. A firm's debt-to-equity ratio is calculated by dividing long-term debt by owners' equity. Both items are shown on the balance sheet. A high debt-to-equity ratio, which indicates very aggressive financing or a history of large losses, results in very volatile earnings. A low debt-to-equity ratio, which indicates conservative financing and low risk, results in fewer possibilities of large losses or large gains in earnings.
