Investors and creditors assess an automotive sector company's financial stability and health by determining its debt-to-equity (D/E) ratio. Investors can use this ratio to determine whether a company is able to fulfill its debt obligations. The automotive sector includes auto dealerships, auto parts stores, auto parts wholesale, auto manufacturers - major, auto parts, recreational vehicles, and trucks and other vehicles industries.
The D/E ratio is used in fundamental analysis to determine a company's financial leverage and is calculated by dividing its total liabilities by its shareholders' equity. A company's D/E ratio should only be compared to the D/E ratios of companies in the same sector or industry.
Using trailing 12-month data, as of May 2015, the respective average long-term D/E ratios of companies in these industries are 65.11 for auto dealerships, 70.81 for auto parts stores, 25.52 for auto parts wholesale, 108.01 for auto manufacturers - majors, 70.53 for auto parts, 151.47 for recreational vehicles and 152.91 for trucks and other vehicles.
The simple average of the D/E ratios of companies in the automotive sector is 92.05, or (65.11 + 70.81 + 25.52 + 108.01 + 70.53 + 151.47 + 152.91) / 7. This average D/E ratio of the automotive sector comprises the D/E ratios of all small-, mid- and large-cap companies included in the sector.
Since the automotive sector is a capital-intensive industry and requires more borrowing than other sectors, companies in this sector are more likely to have higher D/E ratios. Ford Motor Co., a large-cap stock in the automotive sector, has a long-term D/E ratio of 489.87. This indicates that for each $1 of shareholders' equity, Ford has $489.87 in debt. Similarly, Tesla Motors Inc. has a long-term D/E ratio of 312.90, which indicates that for each $1 of shareholders' equity Tesla Motors has $312.90 in debt.