What is the average debt-to-equity ratio of wholesale sector companies?

Standard debt-to-equity (D/E) ratios among wholesalers fall between 0.8 and 1.1, although this range changes from year to year. Even though there are a very large number of sub-industries in the wholesale sector, a surprising number of them report average D/E numbers within this range. This suggests wholesale, as a trade, can support a reasonably high amount of debt in the capital structure.

Debt-to-Equity and Wholesale Sector

D/E is probably the most well-known and oft-reported leverage ratio among corporations. Simply stated, it compares the total debt obligations, or liabilities, for a firm against its equity. The resulting number shows what proportion of the company's capital is based on debt.

In this case, "wholesale" does not refer to wholesale banking, which is a term investors may come across. Instead, the wholesale sector is comprised of companies that distribute non-durable or durable goods. Though some wholesale sector aggregates include wholesale retailers, most do not.

Types of Wholesalers

Sub-industries identified in the wholesaler sector include petroleum, pharmaceuticals, commercial equipment, chemicals, machinery equipment, farming products, computer equipment, apparel, motor parts, paper and packaging, electrical goods and metals.

Metrics among these many sub-industries are all across the board. While industry median gross margins are between 18% and 22%, petroleum wholesale tends to have gross margins closer to 8%, and pharmaceuticals may have average gross margins above 50%.

The same is true of leverage ratios such as D/E. It is not uncommon for farm product wholesalers or petroleum product wholesalers to have D/E at 1.2 or higher. Computer equipment, machinery or electrical goods may have average D/E ratios at less than 0.7. Individual firms may even have D/E ratios above 2 or 3. This level of increased risk is rare but does occur.

Wholesale distributors tend to carry more debt than wholesale retailers. For example, Costco, one of the best-known wholesale retailers in the world, tends to report a D/E most recent quarter (MRQ) of just above 0.40.

(For related reading, see "What Metrics Can Be Used to Evaluate Companies in the Wholesale Sector?")