Debt-to-Equity Ratio (D/E) Key takeaways
The debt-to-equity (D/E) ratio measures how much of a company’s financing comes from debt versus shareholder equity.
D/E = Total liabilities ÷ Shareholders’ equity. Values vary widely by industry.
A higher D/E among comparable firms usually implies greater financial risk; a very low D/E may indicate underused debt financing.
Analysts often focus on long-term debt or adjust definitions of debt and equity for clearer comparisons. What is the debt-to-equity ratio?
The debt-to-equity (D/E) ratio is a solvency metric that compares a company’s total liabilities to its shareholders’ equity. It shows the degree to which a company finances operations with borrowed funds instead of owners’ capital. D/E is one type of gearing (leverage) ratio. Explore More Resources
Formula and how to calculate it
Basic formula:
D/E = Total liabilities ÷ Total shareholders’ equity You can find the inputs on a company’s balance sheet. Shareholders’ equity is typically calculated as total assets minus total liabilities. To compute in a spreadsheet, enter total liabilities in one cell and shareholders’ equity in another, then use a formula such as:
=LiabilitiesCell ÷ EquityCell Explore More Resources
Common modifications
Long-term D/E: Use long-term debt in the numerator to focus on riskier, longer-dated obligations.
Adjustments: Analysts may include or exclude items (e.g., preferred stock, pension liabilities, intangibles, retained earnings) depending on the purpose of the analysis. What the ratio tells you
A high D/E means the firm relies heavily on debt. Debt can boost returns when earnings exceed borrowing costs but adds fixed obligations and default risk.
A low D/E indicates lower financial leverage; it can signal conservative funding or that a company isn’t using debt to finance potentially profitable growth.
* Changes in D/E over time signal shifting capital structure and risk exposure—rising D/E generally means increasing leverage and potential financing stress. Explore More Resources
Short-term alternatives
D/E assesses longer-term capital structure. For short-term liquidity and ability to meet obligations within a year, use:
Current ratio = Short-term assets ÷ Short-term liabilities
Cash ratio = (Cash + Marketable securities) ÷ Short-term liabilities Example
If a company has total liabilities of $279 billion and shareholders’ equity of $74 billion:
* D/E = $279B ÷ $74B ≈ 3.77
This means about $3.77 of debt for every $1 of equity. The number is meaningful only when compared with peers or industry norms. Explore More Resources
Personal finance application
You can compute a personal D/E ratio the same way:
* Personal D/E = Total personal liabilities ÷ (Personal assets − Total liabilities)
Lenders may use this to judge an individual’s or small business owner’s resilience and ability to repay loans after income shocks. D/E ratio vs. gearing
“Gearing” is a general term for financial leverage; D/E is the most common gearing ratio. Both concepts evaluate how much of a firm’s capital comes from debt and the related risk/return trade-offs. Explore More Resources
Limitations and caveats
Industry differences: Capital-intensive and regulated industries (e.g., utilities, banking, airlines) typically have higher D/E norms than tech or services.
Definition inconsistencies: Whether to treat preferred stock as debt or equity affects the ratio materially.
Balance-sheet distortions: Large intangible assets, accumulated losses or gains, pension adjustments, and retained earnings can skew the interpretation of D/E.
Timing and interest-rate sensitivity: Long-term debt creates refinancing risk; short-term debt can be cheaper and less rate-sensitive. What is a “good” D/E?
There’s no universal benchmark. As a rule of thumb:
D/E below 1 is generally conservative.
D/E above 2 may be considered risky for many industries.
Always compare D/E to industry peers and consider business volatility, growth prospects, and interest-rate environment. Explore More Resources
Common questions
What does a D/E of 1.5 mean? — The company has $1.50 of debt for every $1.00 of equity.
What does a negative D/E mean? — Negative shareholders’ equity (liabilities exceed assets), signaling high financial distress and potential insolvency.
* Which industries have high D/E? — Banking, financial services, utilities, airlines, and other capital-intensive sectors commonly have higher D/E ratios. Bottom line
The debt-to-equity ratio is a useful starting point for assessing financial leverage and risk but should not be used in isolation. Compare D/E with industry peers, consider modifications (long-term vs. total debt), and review complementary liquidity and profitability metrics before drawing conclusions about a company’s financial health. Explore More Resources