Glossary
Debt-to-Equity Ratio
Total debt (or total liabilities) divided by shareholders' equity; a measure of how much a company relies on borrowing.
On this page
The debt-to-equity ratio compares what a company has borrowed with what its owners have put in or left in the business. A ratio of 1.0 means a dollar of debt for every dollar of Shareholders' equity. Higher readings mean more Leverage: profits are magnified in good years, but so are losses, and fixed interest bills must be paid whatever happens.
Worked example
Interpreting it
What counts as high depends on the business. Utilities and real estate trusts with steady cash flows routinely carry D/E well above 1; banks are measured with different capital ratios altogether. Software companies with few hard assets often carry little debt. Compare a company with its own history and its industry rather than with a fixed number.
Pitfalls
- Negative or tiny equity. Years of buybacks or losses can push book equity near zero or below it, making D/E huge or meaningless even for a healthy company. Debt relative to cash flow, such as debt-to-EBITDA, or Interest coverage ratio then tells more.
- Cash on hand. A firm with $400 million of debt and $350 million of cash is far less indebted than the gross ratio suggests; analysts often look at net debt.
- Book versus market. Equity on the balance sheet can be far from the company's Market capitalization.