Debt to equity ratio

Debt to Equity Ratio

A financial leverage measure that compares a company’s total debt to its shareholders’ equity, indicating the proportion of financing that comes from creditors versus owners.

For example, a company with $6 million in total liabilities and $4 million in shareholders’ equity would have a debt to equity ratio of 1.5 (or 1.5:1), meaning it has $1.50 of debt for every $1 of equity.

This ratio provides insight into a company’s financial structure and risk profile. Higher ratios indicate greater financial leverage, which can amplify returns when business performs well but also increases financial risk during downturns. Industry norms vary significantly, with capital-intensive industries like utilities typically having higher ratios than technology or service businesses. Lenders and investors use this metric to assess financial risk, with excessive leverage potentially limiting access to additional financing or increasing borrowing costs.