<p>Equity can be negative when a firm accumulates losses and <a href="https://www.investopedia.com/ask/answers/08/negative-shareholder-equity.asp" rel="nofollow noreferrer">liabilities exceed the number of assets</a>. In that case debt ratio can be bigger than 1.</p>

CC BY-SA 4.0
2021-04-21T07:16:55.197Z
2021-04-21T07:16:55.197Z
csilvia
<p>You are righteously bewildered.  Quote &quot;A ratio greater than 1 shows that a considerable amount of a company's assets are funded by debt, which means the company has more liabilities than assets.&quot; clearly does NOT show that what's meant by the authors is the &quot;D/E ratio&quot;. The link you give shows that they do not deal with the issue of default. They do not explain about the definition of default, but explain about leverage of debt.
D/E stands for &quot;Debt/Equity ratio&quot; - debt/ASSETS, just as you say, used in strict meaning, defines the criteria of default and bankruptcy. Thus, the term &quot;assets&quot; should cautiously be used when explaining to laymen. I had the same misunderstanding. In German, e.g. there is &quot;Fremdkapital/Eigenkapital&quot; - it's &quot;capital&quot; only, not assets and/or equity (&quot;assets&quot; on the left, &quot;equity&quot; to the right, on the sheet).</p>

CC BY-SA 4.0
2024-06-11T11:43:56.347Z
2024-06-11T11:51:21.237Z
2024-06-11T11:51:21.237Z
Peter Bernhard
<p>Investopedia has a <a href="https://www.investopedia.com/terms/d/debtratio.asp" rel="nofollow noreferrer">definition about Debt ratio</a>, I do not understand how come Debt ratio can be higher than 1. Because it means that equity is negative (because Total Assets=Debt+Equity).</p>
<p><a href="https://i.sstatic.net/x927g.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/x927g.png" alt="enter image description here" /></a></p>

<debt>
How come debts is higher than assets?
Phil Nguyen
# How come debts is higher than assets?

(Asked by: username_0 on 2021-04-20)

Investopedia has a [definition about Debt ratio](https://www.investopedia.com/terms/d/debtratio.asp), I do not understand how come Debt ratio can be higher than 1. Because it means that equity is negative (because Total Assets=Debt+Equity).

[![enter image description here](https://i.sstatic.net/x927g.png)](https://i.sstatic.net/x927g.png)

**Tags:** debt

---

## 2 answers

### Answer by username_1 on 2021-04-21. Score: 0 | Accepted answer

Equity can be negative when a firm accumulates losses and [liabilities exceed the number of assets](https://www.investopedia.com/ask/answers/08/negative-shareholder-equity.asp). In that case debt ratio can be bigger than 1.


---

### Answer by username_2 on 2024-06-11. Score: 0

You are righteously bewildered. Quote "A ratio greater than 1 shows that a considerable amount of a company's assets are funded by debt, which means the company has more liabilities than assets." clearly does NOT show that what's meant by the authors is the "D/E ratio". The link you give shows that they do not deal with the issue of default. They do not explain about the definition of default, but explain about leverage of debt.
D/E stands for "Debt/Equity ratio" - debt/ASSETS, just as you say, used in strict meaning, defines the criteria of default and bankruptcy. Thus, the term "assets" should cautiously be used when explaining to laymen. I had the same misunderstanding. In German, e.g. there is "Fremdkapital/Eigenkapital" - it's "capital" only, not assets and/or equity ("assets" on the left, "equity" to the right, on the sheet).


---

