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.

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

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.

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.

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.

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.

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.