Debt to Equity Ratio in Stock Market Browser

Stock Market Browser is a tool that can give you a quick snapshot of the total stock market from sector down to individual stock. One of the financial ratios it provides to you is Debt to Equity ratio. However, the meaning of Debt to Equity ratio in Stock Market Browser is different from the traditional meaning of Debt to Equity ratio. In this article, we are going to use Caterpillar’s most recent balance sheet provided by Yahoo Finance to show the calculation of Debt to Equity ratio in Stock Market Browser and compare the number from traditional Debt to Equity ratio. Following is Caterpillar’s quarterly balance sheet from Yahoo Finance:

Traditional Meaning of Debt to Equity Ratio

Normally, Debt to Equity Ratio is defined a company’s total liabilities divided by a company’s averaged shareholders’ equity

From Caterpillar’s balance sheet of most recent quarter, it has total liabilities 68.09B and averaged total shareholders’ equity (12.883B + 14.162B)/2 = 13.52B. Based on the formula above, its debt to equity ratio would be 68.09 / 13.52 = 5.04
However, this number is different from the number provided by Stock Market Browser:



You can find out Caterpillar (CAT) under sector Conglomerate and industry Conglomerate.
As of 04/02/2012, Debt to Equity ratio provided by Stock Market Browser is 258

Derive Debt to Equity Ratio in Stock Market Browser

First of all, the unit of this ratio is 100%. That means 258 is actually 258%. So how Stock Market Browser derives 2.58?
Instead of using total liability to represent total debt, Stock Market Browser only use item “Long Term Debt” and “Short/Current Long Term Debt” to represent total debt. In other words, it only considers total long term debt as real debt.
Based on Caterpillar’s balance sheet of most recent quarter, it has short/current long term debt 9.648B and long term debt 24.944B. The Debt to Equity Ratio would be (9.648+24.944)/13.52 = 2.58, which is 258%
 

Conclusion

In the traditional definition, the company’s total liabilities is used to represent the total debt, but Stock Market Browser only uses total long term debt, which is the portion of liabilities that accrues the most of interest. Because it only uses the portion of liabilities that accrues the most of interest, the ratio can give investors a better measurement in terms of financial leverage and risk.