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. A company issues some shares in order to finance the purchase of some more production ...

    The correct answer is: a) This transaction will increase the assets of the company and its equity by the same amount. Hence, ... Read Answer >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
Related Articles
  1. Investing

    What Is Considered A High Debt-To-Equity Ratio?

    The debt-to-equity ratio divides a firm’s liabilities by its shareholders’ equity to measure its financial leverage.
  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

    What is the Gearing Ratio?

    Gearing ratios are financial ratios that measure a company’s leverage.
  4. Markets

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

    Should you seek high yielding-dividend stocks in the current investment environment?
  5. Markets

    4 Leverage Ratios Used In Evaluating Energy Firms

    Analysts use specific leverage ratios to compare firms within an industry. A basic understanding of these ratios helps when evaluating oil and gas stocks.
  6. Investing

    Analyzing Wal-Mart's Debt Ratios in 2016 (WMT)

    Analyze Wal-Mart's debt-to-equity ratio, interest coverage ratio and cash flow-to-debt ratio to evaluate the company's financial health and debt management.
  7. Investing

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  8. Investing

    Analyzing AT&T's Debt Ratios in 2016 (T)

    Learn about AT&T Inc. and its key debt ratios, such as the debt-to-equity ratio, interest coverage ratio and cash flow-to-debt ratio.
  9. Investing

    Analyzing General Electric's Debt Ratios in 2016 (GE)

    Evaluate GE's debt picture using the most important metrics for a large-cap conglomerate, including the debt-to-equity (D/E) ratio and the interest coverage ratio.
  10. Trading

    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.
RELATED TERMS
  1. Optimal Capital Structure

    The best debt-to-equity ratio for a firm that maximizes its value. ...
  2. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company ...
  3. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  4. Gearing Ratio

    A general term describing a financial ratio that compares some ...
  5. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ...
  6. Capitalization Ratios

    Indicators that measure the proportion of debt in a company’s ...
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center