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Debt-to-Equity Ratio
A leverage ratio comparing total debt to shareholder equity, showing how much a company relies on borrowed money.
Formula
Debt-to-Equity Ratio = Total Liabilities / Shareholder Equity
Or: D/E = (Short-term Debt + Long-term Debt) / Total Equity
Definition
What is Debt-to-Equity Ratio?
D/E ratio measures financial leverage by comparing what the company owes to what shareholders own. It shows the balance between debt financing and equity financing.
D/E Ratio Interpretation
A ratio of 1.0 means equal debt and equity. Below 1.0 indicates more equity than debt (conservative). Above 2.0 is considered highly leveraged. Optimal ratios vary by industry.
Debt Trade-offs
Debt can amplify returns and provides tax benefits (interest is deductible), but increases financial risk and required cash outflows. High D/E ratios make companies vulnerable during downturns.
Example
Company capital structure:
- Short-term Debt: $100,000
- Long-term Debt: $400,000
- Shareholder Equity: $600,000
Total Debt = $500,000
D/E Ratio = $500K / $600K = 0.83
For every dollar of equity, the company has $0.83 of debt. This is a conservative, low-leverage position.
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