3. Leverage ratios

The same considerations apply when computing leverage ratios. The most commonly used leverage ratio divides the firm's total liabilities by the book value of equity. This is the so-called debt-to-equity ratio:

 

Debt-to-equity ratio = \( \frac{\text{Total liabilities}}{\text{Total equity}} \).

 

If we filter out operating liabilities and focus instead of the actual contributions from the providers of capital, an alternative version of the debt-to-equity ratio is:

 

Debt-to-equity ratio (Capital) = \( \frac{\text{Financial liabilities}}{\text{Total equity}} \).

  

Finally, if we focus on market values rather than book values, the debt-to-equity ratio is:

 

Debt-to-equity ratio (Market) = \( \frac{\text{Financial liabilities}}{\text{Market equity}} \).

 

When we apply these ratios to Hershey in 2015, we find the following (see the previous section for all the raw data):

 
Debt-to-equity ratio = \( \frac{\text{Total liabilities}}{\text{Total equity}} = \frac{4'296.9}{1'047.5} \) = 4.1.

 

Debt-to-equity ratio (Capital) =\( \frac{\text{Financial liabilities}}{\text{Total equity}} = \frac{2'420.5}{1'047.5} \)= 2.3.

 

Debt-to-equity ratio (Market) = \( \frac{\text{Financial liabilities}}{\text{Market equity}} = \frac{2'420.5}{19'400} \) = 0.12.

 

In terms of book values, Hershey has 4.1 times as many liabilities as equity and 2.3 times as many financial liabilities as equity. When we look at market values, the debt outstanding corresponds to only 0.12 times the market value of equity.