Debt-to-Equity (D/E)
How much debt there is relative to shareholders' equity — a metric for financial stability and leverage.
In plain terms
Buy a home with $50,000 of your own money and a $100,000 loan, and your debt is twice your own money. A company is the same — debt-to-equity measures "how much debt there is relative to shareholders' money (equity)."
A D/E of 1 means debt equals shareholders' capital; 2 means debt is twice shareholders' capital. It shows the degree to which the company uses debt as a lever to grow the business.
What it tells you
Used well, debt is a lever that boosts returns, but in excess it raises the interest burden and bankruptcy risk. Debt-to-equity lets you gauge which way that balance tips, and whether the company has the fitness to ride out a recession or rising rates.
In a rising-rate period especially, a heavily indebted company's interest costs swell fast, so debt-to-equity becomes a clue to how sensitive the company is to rates.
Formula
debt-to-equity (D/E) = long-term debt ÷ shareholders' equity
What high or low means
The higher the debt-to-equity, the greater the interest burden and sensitivity to rate changes — that is, the financial risk.
But industries with stable, predictable cash flow (utilities like telecom, electricity, gas) often handle a high debt-to-equity without strain. High does not automatically mean dangerous.
The "right debt-to-equity" differs completely by industry. A utility with steady income (electricity, gas) handles heavy debt, but a company whose earnings swing with the cycle taking the same debt is far riskier. Comparing numbers without industry context easily misleads.
This dictionary's debt-to-equity looks only at long-term debt, so short-term debt due within a year and leases (debt attached to rented assets) may be left out. To see the whole debt picture, it is best to read it with net debt (total debt − cash) and net-debt/EBITDA, which shows "how many years of earnings to pay off that debt." Repayment ability shows up more directly there than in a simple ratio.
When buybacks or accumulated losses shrink equity (the denominator), debt-to-equity can look larger than the real risk. You have to look at why the denominator is at its level too.
In 2008, the 158-year-old investment bank Lehman Brothers had borrowed more than 30 times its equity to bet on real estate. In good times that leverage amplified returns, but when home prices turned it worked in reverse.
Even a small loss was amplified 30 times, devouring its capital in an instant, and Lehman's bankruptcy became the fuse of the global financial crisis. It showed, as an extreme case of debt-to-equity, that debt is a friend in good times but the most fearsome enemy in bad.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see Debt-to-Equity and other financial metrics alongside the sector average.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.