A:

In the utilities sector, for companies providing general utilities such as gas and electricity, the average debt/equity ratio, or D/E ratio, is approximately 1.3. For companies primarily engaged in providing water and sewage service, the average ratio is slightly lower, approximately 1.2.

Utilities carry high debt levels as their infrastructure requirements make large, periodic capital expenditures necessary. However, they also have a large amount of investment equity because they are such "bedrock" stocks; they are included in the investment portfolio of many funds and individual investors.

The Utilities Sector

The utilities sector encompasses all companies whose core business involves producing, generating or distributing the basic utilities: gas, electricity and water.

Since utilities typically carry high debt levels, they are subject to interest rate risk, and their D/E ratio is an important metric for evaluating their overall financial health. The stocks of utilities sector companies generally tend to perform best when interest rates fall or are low.

The Debt/Equity Ratio

The D/E ratio is a metric used to determine the degree of a company's financial leverage. The formula to calculate this ratio divides a company’s total liabilities by the amount of equity provided by stockholders. This metric reveals the respective amounts of debt and equity a company utilizes to finance its operations.

When a company’s D/E ratio is high, it suggests the company has taken an aggressive growth financing approach with its debt. One issue with this approach is additional interest expenses can often cause volatility in earnings reports. If earnings generated are greater than the cost of interest, shareholders benefit. However, if the cost of debt financing outweighs the return generated by the additional capital, the financial load could be too heavy for the company to bear.

Evaluating a company using the D/E ratio is dependent on the company's industry. Capital-intensive industries such as utilities have relatively higher D/E ratios. Therefore, D/E ratios should be considered in comparison to similar companies within the same industry. Generally, ratios 0.5 and below are considered excellent, while ratios above 2.0 are viewed unfavorably.

RELATED FAQS
  1. How do I calculate the debt-to-equity ratio in Excel?

    Understand the basics of the debt to equity ratio, how it is interpreted as a measure of financial stability and how it is ... Read Answer >>
  2. If a company has a high debt to capital ratio, what else should I look at before ...

    Learn about some of the financial leverage and profitability ratios that investors can analyze to supplement examining the ... Read Answer >>
  3. What is the average debt/equity ratio of airline companies?

    Find out more about the average long-term debt to equity ratio of companies in the airlines sector and the importance of ... Read Answer >>
  4. What price-to-earnings ratio is average in the utilities sector?

    Explore the utilities sector, and discover how it compares to other market sectors when evaluated using the popular price-to-earnings ... Read Answer >>
  5. 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 >>
  6. Why do shareholders need financial statements?

    Discover the importance of a company's financial statements for stock shareholders in evaluating their equity investment ... 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

    The Debt Report: The Utilities Sector

    Discover how blue chip U.S. utilities companies are using debt, and why it was important for the industry to deleverage after the financial crisis.
  4. Investing

    Key Financial Ratios to Analyze The Automotive Industry

    Learn about the most critically important financial ratios investors and market analysts utilize to evaluate companies in the automotive industry.
  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

    SXC Health Solutions Corp. (USA) Among the Nasdaq's Biggest Movers

    The market is having a bad day so far: the Nasdaq is trading down 0.3%; the S&P 500 has declined 0.4%; and the Dow has slipped 0.5%. The Nasdaq Composite Index is a capitalization-weighted index, ...
  7. Financial Advisor

    The Debt To Equity Ratio

    The debt to equity ratio identifies companies that are highly leveraged and therefore a higher risk for investors. Find out how this ratio is calculated and how you can use it to evaluate a stock.
  8. Investing

    Ratio Analysis

    Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
  9. Investing

    Sysco and Other Big Movers In Services

    The market has been slipping so far today. The Nasdaq has fallen 0.3%; the S&P 500 has fallen 0.4%; and the Dow has declined 0.5%. The Services sector (IYC) is currently lagging behind the overall ...
RELATED TERMS
  1. Capitalization Ratios

    Capitalization ratios are indicators that measure the proportion ...
  2. Utilities Sector

    The utilities sector encompasses stocks from electric, gas, water ...
  3. Leverage Ratio

    A leverage ratio is any one of several financial measurements ...
  4. Debt Ratio

    The debt ratio is a financial ratio that measures the extent ...
  5. Operating Ratio

    The operating ratio shows the efficiency of a company's management ...
  6. Coverage Ratio

    A coverage ratio is a measure of a company's ability to service ...
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center