Debt/Equity Ratio

AAA

DEFINITION of 'Debt/Equity Ratio'

A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

 

Debt/Equity Ratio

Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation.

Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial statements as well as corporate ones.

INVESTOPEDIA EXPLAINS 'Debt/Equity Ratio'

A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.

If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.

The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5.

To learn how D/E ratios can help value investors, check out our tutorial on Stock-Picking Strategies: Value Investing.

VIDEO

Loading the player...
RELATED TERMS
  1. Long-Term Debt

    Long-term debt consists of loans and financial obligations lasting ...
  2. Asset Valuation Review (AVR)

    A process that establishes an estimate of the value of a failed ...
  3. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders ...
  4. Solvency Ratio

    One of many ratios used to measure a company's ability to meet ...
  5. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  6. Long/Short Equity

    An investing strategy of taking long positions in stocks that ...
RELATED FAQS
  1. What debt/equity ratio is common for companies in the telecommunications sector?

    Telecommunications companies engage in capital-intensive projects that require large investments in infrastructure, wireless ... Read Full Answer >>
  2. What debt/equity ratio is typical for companies in the utilities sector?

    In the utilities sector, for companies providing general utilities such as gas and electricity, the average debt/equity ratio, ... Read Full Answer >>
  3. How do you calculate shareholder equity?

    Shareholders' equity is listed on a company's balance sheet and measures its net worth. A company's shareholders' equity ... Read Full Answer >>
  4. Why should investors be wary of off balance sheet financing activities?

    Investors should be wary of companies that rely heavily on off-balance-sheet financing because it may make those businesses ... Read Full Answer >>
  5. What is the average debt/equity ratio of airline companies?

    As of May 2015, based on trailing 12-month data, the average long-term debt/equity ratio of airline companies is 91.53. Airline ... Read Full Answer >>
  6. What debt/equity ratio is average in the automotive sector?

    Investors and creditors assess an automotive sector company's financial stability and health by determining its debt-to-equity ... Read Full Answer >>
  7. What is the average debt/equity ratio for the food and beverage sector?

    The food and beverage sector provides its investors with a variety of investing opportunities ranging from major soft drink ... Read Full Answer >>
  8. What debt/equity ratio should I look for when investing in industrial companies?

    The average long-term debt/equity (D/E) ratio that you should expect for companies in the industrial goods sector is 146.44, ... Read Full Answer >>
  9. What debt/equity ratio is common for companies in the drugs sector?

    The average long-term debt-to-equity (D/E) ratio common for companies in the drugs sector is 70.66 based on trailing 12-month ... Read Full Answer >>
  10. Which financial metrics are best for analyzing companies in the chemicals sector?

    Some of the key financial metrics that investors commonly use to analyze companies in the chemicals sector include the debt-to-equity ... Read Full Answer >>
  11. Does increasing health consciousness among consumers make investing in fast food ...

    An increase in health consciousness does not necessarily make investments in fast food companies unwise, as convenience is ... Read Full Answer >>
  12. What debt to equity ratio is common for a bank?

    The average debt-to-equity ratio for retail and commercial U.S. banks, as of January 2015, is approximately 2.2. For investment ... Read Full Answer >>
  13. How can an investor evaluate the leverage of an insurance company?

    For investors conducting fundamental analyses of insurance companies, leverage can have multiple definitions. Insurance leverage ... Read Full Answer >>
  14. What debt/equity ratio is typical for companies in the insurance sector?

    The debt-to-equity ratio is calculated by dividing total liabilities by total equity, and it is used to measure leverage. ... Read Full Answer >>
  15. What is the typical debt/equity ratio of companies in the chemicals sector?

    The debt-to-equity ratio is equal to the ratio of total assets to total shareholder equity. It is a leverage ratio that measures ... Read Full Answer >>
  16. How does monetary policy influence the Fisher effect?

    One of the chief benefits of funding business operations with paid-up capital is that it does not need to be repaid. Also ... Read Full Answer >>
  17. How does debt affect a company's beta?

    The average debt/equity ratio for the Internet sector is small, at 0.32 for the first quarter of 2015, and an average of ... Read Full Answer >>
  18. Why are coupon payments considered an annuity?

    The electronics sector offers an attractive investing opportunity to diversify portfolios with companies that can offer strong ... Read Full Answer >>
  19. What are the benefits for a company using equity financing vs. debt financing?

    Most companies use a combination of debt and equity financing, but there are some distinct advantages of equity financing ... Read Full Answer >>
  20. If a company has a high debt to capital ratio, what else should I look at before ...

    A variety of equity valuation metrics can be utilized to evaluate a company along with the debt to capital ratio to get a ... Read Full Answer >>
  21. What can I tell about a company by looking at its solvency ratios?

    Solvency ratios gauge a company's financial health and its ability to meet long-term obligations. Use solvency ratios to ... Read Full Answer >>
  22. What are some strategies companies commonly use to reduce their debt to capital ratio?

    Companies can take steps to reduce and improve their debt to capital ratios. Among the strategies that can be employed are ... Read Full Answer >>
  23. What are the different capitalization ratios?

    Capitalization ratios are ratios that measure the amount of debt a company has in relation to its capital structure, or capitalization. ... Read Full Answer >>
  24. Are solvency ratios more concerned with the short-term or the long-term?

    Solvency is a company's ability to meet all of its debt obligations. Solvency generally describes a company's ability to ... Read Full Answer >>
  25. What is the average debt/equity ratio of companies in the financial services sector?

    Investors and lenders assess a company's financial stability by determining its debt to equity (D/E) ratio, also interpreted ... Read Full Answer >>
  26. What is a good debt ratio, and what is a bad debt ratio?

    Debt ratios can be used to describe the financial health of individuals, businesses or governments. Like other accounting ... Read Full Answer >>
  27. How do I calculate the debt-to-equity ratio in Excel?

    The debt to equity (D/E) ratio is an important leverage metric in corporate finance. It is a measure of the degree to which ... Read Full Answer >>
  28. What is the average debt/equity ratio of companies in the forest products sector?

    Sector-specific investments are becoming more popular with investors attempting to diversify portfolio allocations and gain ... Read Full Answer >>
  29. What is the difference between a capital gearing ratio and a net gearing ratio?

    In the finance industry, the term "gearing" can be used in many different contexts. In essence, gearing is a ratio that reflects ... Read Full Answer >>
  30. What is the formula for calculating the debt-to-equity ratio?

    Expressed as a percentage, the debt-to-equity ratio shows the proportion of equity and debt a firm is using to finance its ... Read Full Answer >>
  31. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  32. What are the main differences between return on equity (ROE) and return on assets ...

    Return on equity (ROE) and return on assets (ROA) are two of the most important measures for evaluating how effectively a ... Read Full Answer >>
  33. Are companies with a negative return on equity (ROE) always a bad investment?

    Companies that report losses are more difficult to value than those that report consistent profits. Any metric that uses ... Read Full Answer >>
  34. Is there value in comparing companies from different sectors by using the debt-to-equity ...

    The debt-to-equity ratio is a measure of a company's financial leverage that relates the amount of a firms' debt financing ... Read Full Answer >>
  35. What is considered a high debt-to-equity ratio and what does it say about the company?

    The debt-to-equity ratio is a measure of a company's financial leverage that relates the amount of a firms' debt financing ... Read Full Answer >>
  36. What is the difference between return on equity and return on capital?

    Return on equity (ROE) and return on capital (ROC) measure very similar concepts, but with a slight difference in the underlying ... Read Full Answer >>
  37. What does negative shareholder equity on a balance sheet mean?

    N egative shareholder equity could show up on a company's balance sheet for a number of reasons, all of which should serve ... Read Full Answer >>
  38. What is a debt/equity swap?

    Occasionally, a company will need to undergo some financial restructuring to better position itself for long term success. ... Read Full Answer >>
  39. When is a dividend payment recognized in the shareholders equity portion of the balance ...

    From an accounting point of view, shareholders' equity is decreased by the total dividend amount on the date it is declared ... Read Full Answer >>
  40. What's the difference between short-term investments in marketable securities and ...

    Most of the time, when an investor or analyst searches through the financial statements of a publicly traded company, he ... Read Full Answer >>
  41. Is preferred stock an equity or a fixed-income security?

    Preferred stock is equity. Preferred stock also (usually) has a fixed dividend payout. This is why some investors have referred ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    Making Sense of Netflix's Balance Sheet

    Understand how to assess Netflix's performance based on the major components of its balance sheet.
  2. Stock Analysis

    Is It the Perfect Time to Buy Seadrill?

    Seadrill's low price is enticing to many investors, but does the company have what it takes to regain its former value?
  3. Stock Analysis

    4 Factors that Make or Break Seadrill Stock

    Learn what factors impact the stock price for Seadrill, including crude oil prices, dividend payments, quarterly revenues and debt loads.
  4. Stock Analysis

    Has Seadrill Become a Risky Investment?

    Investing in big oil stocks has long been a safe haven for investors, but falling oil prices and a suspended dividend payment have made Seadrill seem risky.
  5. Investing Basics

    Will Corporate Debt Drag Your Stock Down?

    Borrowed funds can mean a leg up for companies or the boot for investors. Find out how to tell the difference.
  6. Investing Basics

    What Is Private Equity?

    This investment vehicle attracts wealthy investors to increase the value of portfolio companies.
  7. Fundamental Analysis

    Ratio Analysis Tutorial

    If you don't know how to evaluate a company's present performance and its possible future performance, you need to learn how to analyze ratios.
  8. Fundamental Analysis

    Balance Sheet: Analyzing Owners' Equity

    Analyzing owners’ equity is an important analytics tool, but it should be done in the context of other tools such as analyzing the assets and liabilities on the balance sheet.
  9. Personal Finance

    Spotting Companies In Financial Distress

    What are the warning signs that a company is struggling - or worse, sinking - financially? Read on to find out.
  10. Bonds & Fixed Income

    Evaluating A Company's Capital Structure

    Learn to use the composition of debt and equity to evaluate balance sheet strength.

You May Also Like

Hot Definitions
  1. Dog And Pony Show

    A colloquial term that generally refers to a presentation or seminar to market new products or services to potential buyers.
  2. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  3. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  4. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  5. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  6. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!