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.