Syllabus: International Baccalaureate - Individuals and Societies - Business management (Higher Level)
Module: Unit 3: Finance and Accounts
Lesson: 3.6 Debt/Equity Ratio Analysis (HL only)
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Introduction
Unit 3.6 of the IB Business Management Higher Level syllabus focuses on debt/equity ratio analysis, a crucial aspect of understanding corporate finance. This topic equips students with the analytical skills to assess the capital structure of businesses and evaluate financial risk. As part of the Individuals and Societies subject group, this unit not only supports subject knowledge but strengthens broader economic and financial literacy, supporting both the academic and career readiness aims of international education.
Key Concepts
According to the IB syllabus, students studying debt/equity ratio analysis at Higher Level are expected to understand:
The calculation of the debt/equity ratio: Total debt ÷ total equity
Interpretation of the ratio: Indicating the degree of financial leverage and risk exposure
Limitations of the ratio: Including industry differences and the influence of accounting standards
Relationship between capital structure and cost of capital: How debt influences risk and return
Implications for stakeholders: Understanding how a high or low ratio affects investors, creditors and management
This builds upon foundational financial analysis skills learned earlier in the syllabus and prepares students for more advanced decision-making models in later units.
Real-World Relevance
Debt/equity ratio analysis is a live issue in the financial world. For example, consider the contrasting capital structures of two global firms: Tesla, which historically operated with a high debt ratio to fuel rapid expansion, and Apple, which maintains low debt and large reserves to retain strategic flexibility. In 2024, UK-based retailer Wilko entered administration due in part to unsustainable debt levels—highlighting the importance of analysing gearing ratios alongside market conditions.
Teachers can also use current events like interest rate changes from central banks to discuss the impact on borrowing costs, and therefore on the attractiveness of debt financing for businesses.
How It’s Assessed
IB assessments at Higher Level may include:
Paper 1 (based on a case study): Expect data-based questions requiring calculation and interpretation of ratios
Paper 2 (structured questions): May ask students to compare capital structures or advise a business on funding strategy
Command terms to emphasise: Calculate, Analyse, Evaluate, Discuss
Strong answers will:
Show accurate calculations
Interpret what the ratio tells us
Acknowledge context (industry, size, risk appetite)
Apply theory to business decisions
Examiners reward clear structure and real-world integration, especially at HL.
Enterprise Skills Integration
Understanding the debt/equity ratio nurtures commercial awareness, financial literacy, and strategic decision-making—three pillars of workplace readiness. Students apply:
Risk assessment: Weighing financial leverage against flexibility
Data interpretation: Calculating and comparing financial metrics
Stakeholder analysis: Understanding how different groups respond to gearing decisions
Scenario planning: Choosing funding options based on economic context
Tools like business simulations offered by Enterprise Skills allow students to practise making real-time decisions about borrowing vs equity financing.
Careers Links
This unit directly aligns with Gatsby Benchmarks 4, 5 and 6:
Benchmark 4: Links curriculum learning to careers by showing how finance impacts business success
Benchmark 5: Can be reinforced with employer encounters, such as finance professionals or investment analysts
Benchmark 6: Enterprise Skills’ simulations offer structured, workplace-style decision-making around financing and gearing
Related roles and pathways include:
Financial analyst
Investment banking associate
Business consultant
Risk manager
Corporate treasurer
Discussing how these roles assess financial risk and capital structure builds relevance and aspiration for students.
Teaching Notes
Delivery tips:
Use real company balance sheets (e.g. via annual reports) to calculate live ratios
Create mock board meetings where students argue for different funding strategies
Highlight that “ideal” debt/equity ratios differ by industry
Common pitfalls:
Confusing debt/equity ratio with other leverage ratios
Focusing only on calculation, not interpretation
Ignoring context or industry norms
Extension ideas:
Compare gearing with profitability ratios for deeper analysis
Debate: “Is debt always dangerous?” using historical cases (e.g. Lehman Brothers vs Amazon)
Integrate Enterprise Skills’ scenario-based simulations to apply learning in professional contexts
