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Debt-to-Equity Ratio

In short

How much debt the company uses relative to shareholder equity

If a company has $50 in debt and $100 in shareholder equity, D/E is 0.5. Higher means more leveraged — good in boom times, dangerous in downturns.

D/E ratio measures financial leverage. Moderate debt can boost returns (leverage), but excessive debt increases bankruptcy risk. Compare within sectors: utilities often have high D/E (stable cash flows support debt), while tech companies keep it low.

Formula

D/E = Total Debt ÷ Shareholders' Equity

Thresholds

<0.3
Conservative — low risk
0.3-1
Moderate leverage
1-2
High leverage — monitor
>2
Very high — significant risk

Related concepts

  • Current Ratio — If you have $200 in the bank and $100 in bills due this month, your current ratio is 2.0. Above 1 means the company can pay its near-term debts.
  • Interest Coverage — If you earn $5,000/month and your loan payments are $500, your interest coverage is 10x. Higher is safer — it means the company easily affords its debt payments. A company earning just $600 against that same $500 bill has a coverage of only 1.2x and very little room for a bad month.
  • Return on Equity (ROE) — If you invest $100 in a business and it earns $20 profit, ROE is 20%. Higher means the company is better at making money with your investment.