Debt to Equity Ratio (2024)

How much leverage does a company have

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What is the Debt to Equity Ratio?

The Debt to Equity ratio (also called the “debt-equity ratio”, “risk ratio”, or “gearing”), is aleverage ratio that calculates the weight of total debt and financial liabilities against total shareholders’ equity. Unlike the debt-assets ratio which uses total assets as a denominator, the D/E Ratio uses total equity. This ratio highlights how a company’s capital structure is tilted either toward debt or equity financing.

Debt to Equity Ratio (1)

Debt to Equity Ratio Formula

Short formula:

Debt to Equity Ratio = Total Debt / Shareholders’ Equity

Long formula:

Debt to Equity Ratio = (short term debt + long term debt + fixed payment obligations) / Shareholders’ Equity

Debt toEquity Ratio in Practice

If, as per the balance sheet, the total debt of a business is worth $50 million and the total equity is worth $120 million, then debt-to-equity is 0.42. This means that for every dollar in equity, the firm has 42 cents in leverage. A ratio of 1 would imply that creditors and investors are on equal footing in the company’s assets.

A higher debt-equity ratio indicates a levered firm, which is quite preferable for a company that is stable with significant cash flow generation, but not preferable when a company is in decline. Conversely, a lower ratio indicates a firm less levered andcloser to beingfully equity financed. The appropriate debt to equity ratio varies by industry.

Learn all about calculating leverage ratios step by step in CFI’sFinancial Analysis Fundamentals Course!

What is Total Debt?

A company’s total debt isthe sum of short-term debt, long-term debt, and other fixed payment obligations (such as capital leases) of a business that are incurred while under normal operating cycles.Creating a debt schedule helps split out liabilities by specific pieces.

Not all current and non-current liabilities are considered debt. Below are some examples of things that are and are not considered debt.

Considered debt:

  • Drawn line-of-credit
  • Notes payable (maturity within a year)
  • Current portion of Long-Term Debt
  • Notes payable (maturity more than a year)
  • Bonds payable
  • Long-Term Debt
  • Capital lease obligations

Not considered debt:

  • Accounts payable
  • Accrued expenses
  • Deferred revenues
  • Dividends payable

Benefits of a High D/E Ratio

A high debt-equity ratio can be good because it shows that a firm can easily service its debt obligations (through cash flow) and is using the leverage to increase equity returns.

In the example below, we see how using more debt (increasing the debt-equity ratio) increases the company’s return on equity (ROE). By using debt instead of equity, the equity account is smaller and therefore, return on equity is higher.

Another benefit is that typically the cost of debt is lower than the cost of equity, and therefore increasing the D/E ratio (up to a certain point) can lower a firm’s weighted average cost of capital (WACC).

The topic above is covered in more detail in CFI’s Free Corporate Finance Course!

Drawbacks of a High D/E Ratio

The opposite of the above example applies if a company has a D/E ratio that’s too high. In this case, any losses will be compounded down and the company may not be able to service its debt.

If the debt to equity ratio gets too high, the cost of borrowing will skyrocket, as will the cost of equity, and the company’s WACC will get extremely high, driving down its share price.

Debt to Equity Ratio Calculator

Below is a simple example of an Excel calculator to download and see how the number works on your own.

Debt to Equity Ratio (3)

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Debt Equity Ratio Template

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Video Explanation of the Debt to Equity Ratio

Below is a short video tutorial that explains how leverage impacts a company and how to calculate the debt/equity ratio with an example.

Video: CFI’s Financial Analysis Courses

Additional Resources

Debt/Equity Swap

Free Fundamentals of Credit Course

Analysis of Financial Statements

Financial Modeling Guide

See all commercial lending resources

See all capital markets resources

Debt to Equity Ratio (2024)

FAQs

Debt to Equity Ratio? ›

The debt-to-equity (D/E) ratio is used to evaluate a company's financial leverage and is calculated by dividing a company's total liabilities by its shareholder equity. The D/E ratio is an important metric in corporate finance.

What is a good ratio for debt to equity? ›

Generally, a good debt ratio is around 1 to 1.5. However, the ideal debt ratio will vary depending on the industry, as some industries use more debt financing than others. Capital-intensive industries like the financial and manufacturing industries often have higher ratios that can be greater than 2.

Is 0.5 a good debt-to-equity ratio? ›

Generally, a lower ratio is better, as it implies that the company is in less debt and is less risky for lenders and investors. A debt-to-equity ratio of 0.5 or below is considered good.

What does a debt-to-equity ratio of 2.5 mean? ›

The ratio is the number of times debt is to equity. Therefore, if a financial corporation's ratio is 2.5 it means that the debt outstanding is 2.5 times larger than their equity. Higher debt can result in volatile earnings due to additional interest expense as well as increased vulnerability to business downturns.

What does a debt-to-equity ratio of 1.5 mean? ›

A debt-to-equity ratio of 1.5 would indicate that the company in question has $1.50 of debt for every $1 of equity. To illustrate, suppose the company had assets of $2 million and liabilities of $1.2 million. Since equity is equal to assets minus liabilities, the company's equity would be $800,000.

Is 2.0 a good debt-to-equity ratio? ›

What is a good debt-to-equity ratio? Although it varies from industry to industry, a debt-to-equity ratio of around 2 or 2.5 is generally considered good. This ratio tells us that for every dollar invested in the company, about 66 cents come from debt, while the other 33 cents come from the company's equity.

What is a bad debt-to-equity ratio? ›

The maximum acceptable debt-to-equity ratio for more companies is between 1.5-2 or less. Large companies having a value higher than 2 of the debt-to-equity ratio is acceptable. 3. A debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations.

Is 1.4 a good debt-to-equity ratio? ›

A good debt to equity ratio is around 1 to 1.5. However, the ideal debt to equity ratio will vary depending on the industry because some industries use more debt financing than others. Capital-intensive industries like the financial and manufacturing industries often have higher ratios that can be greater than 2.

Is 1.5 a good debt-to-equity ratio? ›

Generally speaking, a debt-to-equity ratio of 1.5 or less is considered good. A high debt-to-equity ratio indicates that a company funds its operations and growth primarily with debt, indicating a higher risk profile because they have more debt to repay.

Is 0.1 a good debt-to-equity ratio? ›

Debt-to-equity ratio values tend to land between 0.1 (almost no debt relative to equity) and 0.9 (very high levels of debt relative to equity). Most companies aim for a ratio between these two extremes, both for reasons of economic sustainability and to attract investors or lenders.

What is the debt-to-equity ratio of JP Morgan? ›

JPMorgan Chase Debt to Equity Ratio: 1.885 for March 31, 2024.

What is the debt-to-equity ratio of Apple? ›

31, 2023.

Is a debt-to-equity ratio of 4 bad? ›

Since a high debt-to-equity ratio is associated with increased risk, investors typically prefer businesses with low to moderate D/E ratios (1-2). Overleveraged companies might not appeal to potential investors due to the increased probability of bankruptcy.

Is a 1.8 debt-to-equity ratio good? ›

Generally, a good debt-to-equity ratio is anything lower than 1.0. A ratio of 2.0 or higher is usually considered risky.

Is 0 a good debt-equity ratio? ›

Generally speaking, a debt-to-equity ratio of between 1 and 1.5 is considered 'good'.

What does a debt-to-equity ratio of 0.75 mean? ›

A debt-to-equity ratio of 1.0 means that for every dollar of equity a company has, it uses $1 of debt to run the business. A debt-to-equity ratio of 2.0 means that for every $1 of equity a company has, it taps into $2 of financing. A debt-to-equity ratio of 0.75 equates to 75 cents borrowed for every $1 of equity.

Is a debt-to-equity ratio of 50% good? ›

Yes, a D/E ratio of 50% or 0.5 is very good. This means it is a low-debt business and the company's equity is twice as high as its debts.

Is a debt-to-equity ratio of 0.75 good? ›

Good debt-to-equity ratio for businesses

Many investors prefer a company's debt-to-equity ratio to stay below 2—that is, they believe it is important for a company's debts to be only double their equity at most. Some investors are more comfortable investing when a company's debt-to-equity ratio doesn't exceed 1 to 1.5.

Is a 40% debt-to-equity ratio good? ›

Most lenders hesitate to lend to someone with a debt to equity/asset ratio over 40%. Over 40% is considered a bad debt equity ratio for banks. Similarly, a good debt to asset ratio typically falls below 0.4 or 40%. This means that your total debt is less than 40% of your total assets.

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