Loading the player...
A:

The debt-to-equity ratio is a measure of a company's financial leverage that relates the amount of a firms' debt financing to the amount of equity financing. It is calculated by dividing a firm's total liabilities by total shareholders' equity. What is considered a "high" debt-to-equity ratio differs depending upon the industry, because some industries tend to utilize more debt financing than others. There is no single value above which would be deemed a high debt-to-equity ratio.

The financial industry, for example, typically has a higher debt-to-equity ratio. This is due to the fact that banks and other financial institutions borrow money to lend money, which results in a higher debt-to-equity ratio. Other industries that are highly capital intensive, such as services, utilities and the industrial goods sector, also tend to have higher debt-to-equity ratios.

As a result, investors must look at a company's historical debt-to-equity ratio figures to determine if there have been significant changes that could indicate a red flag. In addition, investors must also make comparisons between other similar companies and the industry as a whole to determine if a particular firm has what could be considered a high debt-to-equity ratio.

A higher debt-to-equity ratio typically shows that a company has been aggressive in financing its growth with debt, and there may be a greater potential for financial distress if earnings do not exceed the cost of borrowed funds.

RELATED FAQS
  1. Is there value in comparing companies from different sectors by using the debt-to-equity ...

    Find out why using the debt-to-equity ratio for reviewing companies doesn't always make for an apples-to-apples comparison. Read Answer >>
  2. What is the formula for calculating the debt-to-equity ratio?

    Find out how to use this fundamental financial ratio to help assess a company's performance. Read Answer >>
  3. What debt/equity ratio is typical for companies in the insurance sector?

    Learn about the average debt-to-equity ratio among insurance providers. Find out about the ranges of D/E among insurers and ... Read Answer >>
  4. What is the difference between the capital adequacy ratio and the leverage ratio?

    Explore what differentiates the capital adequacy ratio from any one of several leverage ratios used for equity evaluation ... Read Answer >>
  5. Which leverage ratios are most useful for analyzing manufacturing companies?

    See which leverage ratios investors and creditors are likely to use when analyzing the debt burdens for manufacturing companies. Read Answer >>
  6. How can an investor evaluate the leverage of an insurance company?

    Learn about insurance leverage, what leverage means in the context of insurance companies and what metrics investors should ... Read Answer >>
Related Articles
  1. Investing

    Debt Reckoning

    Learn about debt ratios and how to use them to assess a company's financial health. You could save a lot of money!
  2. Investing

    Understanding Leverage Ratios

    Large amounts of debt can cause businesses to become less competitive and, in some cases, lead to default. To lower their risk, investors use a variety of leverage ratios - including the debt, ...
  3. Investing

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  4. Investing

    Useful Balance Sheet Metrics

    These metrics can help you better understand the information found on balance sheets.
  5. Investing

    4 Simple Investing Ratios You Need To Know

    Dissecting a company’s financial statements to uncover ways to make money is a challenging endeavor. Here are four ratios that can help.
  6. Investing

    6 Basic Financial Ratios And What They Reveal

    Here's a brief introduction to six financial ratios every investor should be familiar with.
  7. Investing

    Analyzing Oracle's Debt Ratios in 2016 (ORCL, SAP)

    Learn how the debt ratio, debt-to-equity ratio and debt-to-capital ratio are used to evaluate Oracle Corp.'s liabilities, equity and assets.
  8. Investing

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  9. Investing

    The 10 Biggest REITs in the U.S.: Dos and Don'ts (SPG, PSA)

    Five of these REITs may offer potential over the next 1-3 years. Be careful with the other half.
RELATED TERMS
  1. Accounting Ratio

    A way of expressing the relationship between one accounting result ...
  2. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ...
  3. Gearing Ratio

    A general term describing a financial ratio that compares some ...
  4. Long-Term Debt To Capitalization Ratio

    A ratio showing the financial leverage of a firm, calculated ...
  5. Debt Financing

    When a firm raises money for working capital or capital expenditures ...
  6. Long Term Debt To Total Assets Ratio

    A measurement representing the percentage of a corporation's ...
Hot Definitions
  1. Leverage

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. ...
  2. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  3. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  4. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  5. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  6. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
Trading Center