Debt-to-Equity Ratio

The Debt-to-Equity Ratio is a financial leverage ratio that compares a company’s total debt to its shareholders’ equity. It is a key indicator of a company’s financial health, showing how much of its funding comes from debt versus equity. A higher debt-to-equity ratio suggests that the company is more leveraged, meaning it relies more on borrowed funds, which can increase financial risk.

Example

A company with $10 million in debt and $20 million in equity has a debt-to-equity ratio of 0.5, indicating it has half as much debt as equity.

Key points

• The debt-to-equity ratio compares a company’s total debt to its equity, showing its level of financial leverage.

• A higher ratio indicates more reliance on debt, which can increase financial risk.

• It is a key metric for assessing a company’s capital structure.

Quick Answers to Curious Questions

What is a healthy debt-to-equity ratio?

A ratio below 1 is generally considered healthy, as it indicates the company is not overly reliant on debt compared to equity.

How is the debt-to-equity ratio calculated?

It is calculated by dividing a company’s total debt by its total shareholders’ equity.

What does a high debt-to-equity ratio suggest?

A high ratio suggests that a company is more reliant on debt financing, which can lead to higher interest costs and financial risk.