Debt-to-Equity Ratio

Leverage Ratio Investment Wiki — Fundamentals
The Debt-to-Equity (D/E) Ratio is a solvency metric that compares a company's total debt to its total shareholder equity. It illustrates how aggressively a company is financing its growth with borrowed money (leverage) versus its own cash (equity). A high ratio indicates a risky, highly-leveraged capital structure.
Quick Reference
Type Leverage / Solvency Ratio
Formula Total Liabilities ÷ Total Shareholders' Equity
Conservative Target < 1.0
High Risk Zone > 2.0 (Industry dependent)
Best Used For Assessing bankruptcy risk and financial leverage

1.0 The Formula

Basic Form

formulaD/E Ratio = Total Liabilities / Total Shareholders' Equity

Both figures are found on the company's Balance Sheet. "Total Liabilities" encompasses all short-term and long-term debt, while "Total Shareholders' Equity" represents the net asset value of the company's stock.

Worked Example

Company Total Liabilities Total Equity D/E Ratio
Company X $500M $1,000M 0.50
Company Y $1,500M $500M 3.00
Company Z $0M $800M 0.00

Company X has half as much debt as it does equity, demonstrating a strong, conservative balance sheet. Company Y has three times more debt than equity; while they may be generating higher ROE by borrowing money, their insolvency risk during a downturn is massive. Company Z is completely debt-free.

Because debt turbo-charges the balance sheet, a highly leveraged company (high D/E) will typically show an artificially high Return on Equity (ROE) via the DuPont equation.

2.0 Interpretation & Edge Cases

Benchmarks

Like all ratios, D/E must be compared inside its specific industry sector:

  • 0.0 - 0.5: Exceptional financial strength. The company runs entirely off its own cash. Common in dominant tech monopolies.
  • 1.0 - 2.0: Normal range for capital-intensive companies (e.g., manufacturing, automakers, airlines). They must borrow to buy expensive machinery.
  • > 2.5: Typical of financial institutions, banks, or highly leveraged buyout targets. Banks inherently operate with D/E ratios of 10.0 or more because deposits count as liabilities.

When it Fails (Pitfalls)

A D/E ratio of 5.0 sounds terrifying—but what if that debt is locked in for 30 years at 1% interest? The D/E ratio fails to account for the *cost of servicing the debt*.

Never use Debt-to-Equity alone. You must pair it with the Interest Coverage Ratio. If a company owes a billion dollars but generates ten billion dollars in free cash flow every year, the debt load is completely trivial, even if the D/E ratio looks high.

3.0 Related Pages

Interest Coverage Ratio

D/E shows how much debt exists; Interest Coverage shows if the company can actually afford the monthly payments.

Return on Equity (ROE)

Debt is one of the three levers in DuPont analysis that mathematically increases ROE. High D/E often equals a boosted ROE.

Current Ratio

While D/E assesses long-term leverage risk, the Current Ratio answers if the company can survive the next 12 months.