have you ever gone to apply for a loan and found terms like debt to equity ratio mind-boggling debt is something typically money that your agribusiness still owes while equity is the amount of capital that your business actually owns like land equipment and other assets after subtracting all debts your debt to equity ratio is simply a measure of your operations financial leverage simply put financial leverage is the extent to which your business is using borrowed money here’s a simplified way to think about it when it comes to your own operation mr. Smith and mr. Jones go to the bank for business loans the loan officer assesses each of their balance sheets mr. Smith has three hundred thousand dollars in assets cash and equipment and two hundred and fifty thousand dollars in liabilities mainly loans so mr. Smith’s equity is fifty thousand dollars the loan officer divides mr. Smith’s liabilities by his equity to come up with a ratio of five this means that mr. Smith has five dollars of debt for every one dollar of equity making him highly leveraged and a high risk for the bank his application is declined mr. Jones’s balance sheet is far stronger mr. Jones has two hundred thousand dollars in assets and only forty thousand dollars in liabilities his equity is one hundred and sixty thousand dollars mr. Jones’s debt to equity ratio is 0.25 this means mr. Jones has 25 cents of debt for every dollar of equity mr. Jones’s low debt to equity ratio makes his farm business a low risk for the bank and his application is approved again the debt to equity ratio identifies whether or not your farm business is highly leveraged and now you understand one of many metrics of bank uses when assessing a loan application so go ahead and calculate your own debt to equity ratio