A:

Investors and lenders assess a company's financial stability by determining its debt to equity (D/E) ratio, also interpreted as the relationship between financing a company's operations through shareholders contributions and creditor contributions. The D/E ratio is a simple calculation, expressed as a company's total debt divided by total equity, and allows investors and creditors to analyze how the business would be able to fulfill its debt obligations in the event of liquidation. For example, a company with total long-term debt of $10 million and total shareholders' equity of $6 million has a D/E ratio of 1.67, meaning the company has $1.67 of debt for each $1 of shareholders' equity. For most industries, a lower D/E ratio is more attractive to investors and creditors.

Average Debt to Equity Ratio of the Financial Services Industry

The financial services industry requires more borrowing than other industries. As such, companies operating within this sector are more apt to have higher D/E ratios. The financial services industry is made up of a wide range of companies, including those that provide credit services, banking and lending institutions, asset management firms as well as regional and national brokerage firms. The average D/E ratio for the broad financial services industry is 90.89 as of February 2015.

The average D/E ratio for the financial services industry is made up of more concentrated sectors, including closed-end debt funds with a D/E ratio of 32.32, insurance brokerage companies with an average D/E ratio of 120.95, and credit services companies with an average D/E ratio of 455.74. Closed-end equity funds have the lowest D/E ratio, at 2.04, while mortgage investment banks have the highest average of 5433.44.

RELATED FAQS
  1. Why are coupon payments considered an annuity?

    Learn about the average debt to equity (D/E) ratio for firms in the electronics sector and what the median D/E ratio is and ... Read Answer >>
  2. What debt/equity ratio should I look for when investing in industrial companies?

    Find out more about the industrial goods sector, what the debt/equity ratio measures and what ratio is typical for industrial ... Read Answer >>
  3. What debt/equity ratio is common for companies in the drugs sector?

    Find out more about the drugs sector, what the debt-to-equity ratio measures and what debt-to-equity ratio is common for ... Read Answer >>
  4. What debt/equity ratio is common for companies in the telecommunications sector?

    Learn the average debt-to-equity ratio for the telecommunications sector and how including operating leases can substantially ... Read Answer >>
  5. What debt/equity ratio is typical for companies in the utilities sector?

    Discover how the debt/equity ratio is used to measure a company’s leverage, and learn the typical debt/equity ratios for ... Read Answer >>
Related Articles
  1. Investing

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  2. 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.
  3. Investing

    Financial Ratios to Spot Companies Headed for Bankruptcy

    Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
  4. Investing

    Analyzing Verizon's Debt Ratios in 2016 (VZ)

    Analyze Verizon's key debt ratios, and understand how the company has been able to expand in recent years by safely increasing its debt load.
  5. 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.
  6. Investing

    Debt Ratios

    Learn about the debt ratio, debt-equity ratio, capitalization ratio, interest coverage ratio and the cash flow to debt ratio.
  7. Investing

    Analyzing Pepsico's Debt Ratios in 2016 (PEP)

    Learn about PepsiCo and its financial leverage by looking at its debt-to-equity ratio, interest-coverage ratio and operating cash flow-to-debt ratio.
  8. Investing

    Calculating Long-Term Debt to Total Assets Ratio

    A company’s long-term debt to total assets ratio shows the percentage of its assets that are financed with long-term debt.
RELATED TERMS
  1. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained ...
  2. Leverage Ratio

    A leverage ratio is any one of several financial measurements ...
  3. Debt Financing

    Debt financing occurs when a firm raises money for working capital ...
  4. Operating Ratio

    A ratio that shows the efficiency of a company's management by ...
  5. Gearing Ratio

    A general term describing a financial ratio that compares some ...
  6. Total Debt to Total Assets

    Total debt to total assets is a leverage ratio that defines the ...
Hot Definitions
  1. Short Covering

    Short covering is buying back borrowed securities in order to close an open short position.
  2. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  3. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  4. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  5. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  6. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
Trading Center