What is Debt-to-Equity?
The Debt-to-Equity (D/E) ratio measures financial leverage: how much of a company's assets are financed by creditors versus shareholders. A higher D/E ratio means greater financial risk: more interest expense, higher probability of distress in a downturn, and reduced financial flexibility. Optimal leverage varies by industry: capital-intensive sectors (utilities, real estate) routinely operate with D/E of 1-3×; technology companies often have very low or zero debt. D/E below 0.5 is generally considered conservative; above 2.0 warrants scrutiny unless the business generates highly stable cash flows (like regulated utilities). Interest coverage should always be checked alongside D/E.
Formula
D/E Ratio = Total Debt / Shareholders' Equity
Net D/E = (Total Debt − Cash) / Shareholders' Equity
Total Debt = short-term borrowings + long-term debt
Net D/E subtracts cash, reflecting the ability to pay down debt immediately
Calculator
How to Use
- 1Find total debt: Short-term borrowings (current portion of debt) + long-term debt, from the balance sheet.
- 2Find shareholders' equity: Total assets − total liabilities, from the balance sheet.
- 3Divide: Total Debt ÷ Equity. A result of 0.8 means 80 cents of debt for every dollar of equity.
- 4Check coverage: D/E alone is incomplete. Always pair with interest coverage ratio to assess the company's ability to service its debt.
Worked Example
Example: Two companies with same D/E
Total Debt
$4B
Equity
$5B
D/E = 4/5 = 0.80×. Moderate leverage. But if one company earns EBIT of $2B (coverage 5×) and another earns $400M (coverage 1×), the risk profiles are completely different despite the same D/E. Always read D/E alongside the interest coverage ratio.