Debt-to-Equity Ratio

Debt-to-Equity Ratio is a measure of financial leverage, indicating what proportion of equity and debt a company is using to finance its assets.  A high ratio implies that a company has been aggressive in financing its growth through debt.

Debt-to-Equity Ratio

Debt-to-Equity Ratio is a measure of financial leverage, indicating what proportion of equity and debt a company is using to finance its assets.  A high ratio implies that a company has been aggressive in financing its growth through debt and may be high risk for investors.


Debt-to-Equity Ratio Formula

The debt-to-equity ratio is calculated by dividing the total liabilities by the shareholders' equity.  Both figures are provided on the company balance sheet.

Debt-to-Equity Ratio formula: Liabilities / Equity

Debt-to-Equity Ratio Interpretation

In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations. However, a low debt-to-equity ratio may also indicate that a company is not taking advantage of the increased profits that financial leverage may bring.

US companies have an average Debt-to-Equity Ratio of approximately 1.5.  This is typical for other countries as well.  The optimal Debt-to-Equity Ratio is considered to be about 1, i.e. liabilities = equity, but the ratio is industry specific, depending on the proportion of current and non-current assets.

The more non-current the assets (as in the capital-intensive industries), the more equity is required to finance these long term investments. For most companies the maximum acceptable debt-to-equity ratio is 2, the exception being large public companies which may have a Debt-to-Equity Ratio higher than 2.

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