Debt-to-Equity Ratio

The debt-to-equity ratio, often written D/E, shows how a company finances its assets: with borrowed money or with owners' money. The common formula is total liabilities divided by shareholders' equity. Many analysts use a narrower version that includes only interest-bearing debt.

Example: a company has $600 million in debt and $400 million in shareholders' equity. Its D/E ratio is 1.5, meaning it uses $1.50 of debt for every $1 of equity.

A higher ratio means more financial leverage. Debt can increase returns for shareholders when business is good, but it also adds fixed interest costs and repayment obligations. In a downturn or when interest rates rise, highly indebted companies are more vulnerable.

There is no universal ideal level. Utilities, telecom companies and real estate firms typically carry more debt because their cash flows are steady, while many technology companies have little debt. Banks are usually analyzed with different measures altogether.

The ratio can be distorted when equity is very small or negative, for example after large share buybacks or accumulated losses. Investors often look at it together with interest coverage and the current ratio.