# 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 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.