The debt-to-equity ratio divides a firm’s liabilities by its shareholders’ equity to measure its financial leverage. A firm with $10 million in total liabilities and $8 million in shareholder equity has a debt-to-equity ratio of 1.25. For every dollar of equity its shareholders own, the firm owes $1.25.No single value can be deemed a high ratio because the assessment depends on the industry. Since they borrow money to lend money, firms in the financial industry typically have higher debt-to-equity ratios. Capital-intensive sectors such as service and industrial goods frequently do, as well. A higher ratio shows a company uses debt to finance much of its growth. If earnings do not exceed the cost of its loans, financial distress might be lurking around the corner. Debt-to-equity ratios can serve as red flags for certain investments, but investors should only use the ratio to compare similar companies.