In one sentenceTotal liabilities divided by equity, showing how many riyals of creditors' money stand against each riyal of the owners' money.
Simply put
If the ratio is 1, creditors and owners finance the business equally, and if it is higher, other people's money is greater than the owners' money.
Some analysts calculate it using only interest-bearing loans, and some using all liabilities. Decide which method you use and stick to it when comparing years.
Worked example
A contracting business has liabilities of 1,200,000 SAR and equity (capital and retained earnings) of 800,000 SAR.
Total liabilities1,200,000 SAR
Equity800,000 SAR
Ratio = 1,200,000 ÷ 800,0001.5 times
Formula: Total liabilities ÷ equity
Don't confuse it with
Debt ratioThe debt ratio divides by assets, so it does not exceed 100% as long as equity is positive, while this ratio can go well above 1.