Debt-to-Equity Ratio (D/E)
How much debt a company carries relative to shareholders' equity — a measure of financial stability and leverage.
Debt-to-Equity (D/E) = Long-term debt ÷ Shareholders' equity
The higher the debt-to-equity ratio, the greater the interest burden and sensitivity to rate changes — that is, the greater the financial risk.
In plain terms
If you buy a house with $50,000 of your own money and a $100,000 loan, your debt is twice your own money. The debt-to-equity ratio looks at the same thing for a company: "how much debt is there relative to shareholders' money (equity)?"
A D/E of 1x means debt and shareholders' equity are equal; 2x means debt is twice shareholders' equity. It shows how far the company uses debt as a lever to grow its business.
The filled part is the debt. Filling the bar means 1.0; overflowing means there is more debt than shareholders’ money.
Debt is not a problem in itself. Profit made with borrowed money lifts ROE, and ROE does not show the borrowing — this bar fills that gap.
The figures belong to a made-up company, Example Inc. Every picture in this glossary uses the same company, so you can see how the metrics connect.
What it tells you
Used well, debt is a lever that can amplify returns, but as it grows it also increases interest burden and the risk of failure. The debt-to-equity ratio helps you gauge which way that balance tilts, and whether the company has the stamina to withstand a downturn or rising rates.
In periods of rising interest rates in particular, interest costs at heavily indebted companies swell quickly, so the D/E ratio becomes a clue to how sensitive a 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 ratio, the greater the interest burden and sensitivity to rate changes — that is, the greater the financial risk.
That said, industries with steady, predictable cash flows (utilities such as telecom, electricity and gas) often carry high debt-to-equity ratios without strain. A high figure is not automatically risky.
What counts as an "appropriate debt ratio" differs completely by industry. Utilities (electricity, gas, etc.), whose revenue comes in steadily, can carry heavy debt, but a company whose business swings with the economy takes on far more risk with the same debt. Comparing numbers alone without industry context easily leads to a misreading.
The debt ratio in this dictionary looks only at long-term debt, so short-term debt due within a year and leases (debt attached to assets that are rented) may be left out. To see debt in full, net debt (total debt − cash on hand) and net debt/EBITDA, which shows "how many years of earnings it would take to repay that debt," include those parts. The ability to repay shows up more directly there than in a simple ratio.
If equity (the denominator) shrinks because the company buys back its own shares or losses accumulate, the debt ratio can look larger than the actual risk. The answer lies in why the denominator is at that level.
In 2008, Lehman Brothers, an investment bank with 158 years of history, borrowed more than 30 times its equity and bet it on real estate. In good times that leverage magnified returns, but once housing prices turned, it worked in exactly the opposite direction.
Even small losses were amplified 30-fold and ate through capital in no time; Lehman went bankrupt and became the trigger of the global financial crisis. It showed, as an extreme case of the debt ratio, that debt is a friend when things go well and the most fearsome enemy when they go badly.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see Debt-to-Equity alongside the sector benchmark.
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.