Debt-to-Equity Ratio
Total debt divided by total equity — a measure of financial leverage and risk.
The debt-to-equity ratio measures how much a company relies on borrowed money versus shareholder investment to finance its operations. It's calculated as Total Debt / Total Shareholders' Equity.
A ratio of 1.0 means the company has equal amounts of debt and equity. Above 1.0 means it's more debt-funded (leveraged); below 1.0 means it's more equity-funded (conservative).
Higher leverage amplifies both returns and risks. When business is good, debt financing boosts return on equity because shareholders benefit from growth funded by cheaper debt. When business deteriorates, high debt creates fixed obligations (interest and principal) that must be paid regardless of revenue.
Acceptable debt-to-equity ratios vary significantly by industry. Capital-intensive industries (utilities, real estate, manufacturing) commonly operate at 1.5-3.0x. Technology companies typically maintain ratios below 0.5x. Banks have unique capital requirements set by regulators.
Related Terms
A snapshot of a company's assets, liabilities, and equity at a specific point in time.
Current assets divided by current liabilities — a quick test of short-term debt coverage.
The total value of a business including equity and debt, minus cash — used in M&A and valuation multiples.