What the debt-to-equity ratio tells you
The debt-to-equity (D/E) ratio compares what a company owes with what its owners have put in and kept. A D/E of 1.5 means it has $1.50 of liabilities for every $1 of shareholders' equity. A higher number means more of the business is paid for with borrowed money, which is called being more leveraged.
How it's calculated
Debt ratio = total debt ÷ total assets
Debt ÷ (debt + equity) = total debt ÷ (total debt + equity)
Every balance sheet balances: assets = liabilities + shareholders' equity. So if you know two of them, you know the third. That's why you can enter assets instead of equity.
Which "debt"? The SEC's guide uses total liabilities, which includes things like accounts payable and deferred revenue. Many analysts use only interest-bearing debt (bank loans, bonds, notes and finance leases), which is usually smaller. Switch between the two above. When debt means total liabilities, the debt ratio and debt ÷ (debt + equity) are the same number, because liabilities + equity = assets.
Worked example
A company reports total liabilities of $600,000 and shareholders' equity of $400,000, so its assets are $1,000,000.
- D/E = 600,000 ÷ 400,000 = 1.5
- Debt ratio = 600,000 ÷ 1,000,000 = 60%
- If only $250,000 of the liabilities are loans and bonds: D/E = 250,000 ÷ 400,000 = 0.625, and debt ÷ (debt + equity) = 250,000 ÷ 650,000 = 38.46%.
| D/E ratio | Debt per $1 of equity | Debt ÷ (debt + equity) |
|---|---|---|
| 0.25 | $0.25 | 20% |
| 0.5 | $0.50 | 33.33% |
| 1 | $1.00 | 50% |
| 1.5 | $1.50 | 60% |
| 2 | $2.00 | 66.67% |
| 3 | $3.00 | 75% |
Is my D/E ratio good?
There's no single good number. The SEC notes that desirable ratios vary by industry. Banks, utilities and real estate firms often carry much more debt than software companies, for example. Compare a company with others in the same industry, and with its own history.
Limitations
- Book equity can be far from market value. Companies that buy back a lot of stock can show small or negative equity even when they're healthy.
- With zero or negative equity, D/E isn't meaningful, so the calculator shows the debt ratio instead.
- Different data sites define "debt" differently, so their D/E for the same company may not match yours.
- This is a business ratio. For personal borrowing, lenders look at your debt-to-income ratio.