Debt to equity ratios for healthy businesses (2024)

Taking on too much debt can make you less flexible and expose you to risk if revenues fall or interest rates rise.

Exactly what level of debt is suitable for your business depends on your precise requirements at any one time.

There is a healthy level of debt, or 'gearing', that enables a business to grow and capture market share.

It's not an exact science, however, and what's regarded as healthy will also differ from industry to industry.

For example, capital-intensive industries such as manufacturing commonly have higher levels of debt than, say, a tech company that operates online.

The debt ratio is a simple formula to show how capital has been raised to run a business.

It's considered an important financial metric because it indicates (a) how financially stable a company is when facing problems with trading or other operational considerations and (b) what ability it has to raise additional capital for growth.

What is the debt to equity ratio?

A company's debt ratio is commonly seen as a measure of its stability.

The ratio measures the level of debt the company takes on to finance its operations, against the level of capital, or equity, that's available.

It's calculated by dividing a business' total liabilities by the total amount of shareholders' equity.

Shareholders' equity represents the company's net worth - that is, the amount shareholders would receive if the company's total assets were liquidated and all of its debts repaid.

It might also be calculated by subtracting the company's total liabilities from its total assets, both of which are itemised on the company's balance sheet.

The resulting figure shows how much the company relies on debt.

A higher ratio suggests that it is more dependent on funding from outside the business, and therefore potentially less stable if it were to encounter problems with trading or other factors relating to how it operates.

Why is the debt ratio important?

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.

A high debt ratio indicates a business using debt to finance its growth.

Companies that invest large amounts of money in assets and operations (capital-intensive companies) often have a higher debt ratio.

For lenders and investors, a high ratio means a riskier investment because the business might not be able to make enough money to repay its debts.

If a debt ratio is lower - closer to zero - this often means the business hasn't relied on borrowing to finance operations.

Investors can be unwilling to invest in a company with a very low ratio, as it suggests the business isn't realising the potential profit or value it could gain by borrowing and increasing the scale of its operations.

Servicing your debt

When deciding what level of debt is suitable for your business, you should consider whether you'll be able to service that debt in the future.

Determining whether your level of debt is healthy means asking questions like the following:

  • Do you operate in an industry that naturally requires a high level of debt to function effectively and keep up with competitors?
  • How does the result of your debt ratio analysis compare with companies of a similar set-up in your sector?
  • Have you provided a personal guarantee for any of the business' borrowing?
  • Is your market likely to decline in the near future?
  • Could a rise in interest rates affect your ability to service the debt?

Be aware that providing personal guarantees for business borrowing is common, but it can put you at risk of personal liability should the company get into difficulty.

Dealing with debt

If you're having problems dealing with debt, there may be some measures you can take.

Find out more on our Dealing with debt page.

You might also consider debt consolidation and refinancing as possible ways to reduce your monthly repayments.

Even if you don't have any immediate issues, you should make sure your business has sufficient working capital to cope with tougher trading conditions.

Reference to any organisation, business and event on this page does not constitute an endorsem*nt or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circ*mstances and, where appropriate, seek professional or specialist advice or support.

Debt to equity ratios for healthy businesses (2024)


Debt to equity ratios for healthy businesses? ›

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.

What is a healthy debt-to-equity ratio for a company? ›

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 0.5 a good debt-to-equity ratio? ›

Generally, a mix of equity and debt is good for a company, and too much debt can be a strain on a company's finances. Typically, a debt ratio of 0.4 or below would be considered better than a debt ratio of 0.6 and higher.

What is a healthy debt to asset ratio for a company? ›

In general, a ratio around 0.3 to 0.6 is where many investors will feel comfortable, though a company's specific situation may yield different results.

What is a healthy amount of debt for a business? ›

As a general rule, you shouldn't have more than 30% of your business capital in credit debt; exceeding this percentage tells lenders you may be not profitable or responsible with your money. Plus, relying on loans for one-third of your operating money can lower your business credit score significantly.

Is 50% debt-to-equity ratio 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 2.5 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.

Is 0.7 a good debt-to-equity ratio? ›

The debt-to-equity ratio is calculated by dividing a corporation's total liabilities by its shareholder equity. The optimal D/E ratio varies by industry, but it should not be above a level of 2.0.

Is 1.4 a good debt-to-equity ratio? ›

Generally, a good debt-to-equity ratio is anything lower than 1.0. A ratio of 2.0 or higher is usually considered risky. If a debt-to-equity ratio is negative, it means that the company has more liabilities than assets—this company would be considered extremely risky.

What does a debt-to-equity ratio of 0.4 mean? ›

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.

How much debt is okay for a small business? ›

If your business debt exceeds 30 percent of your business capital, this is another signal you're carrying too much debt. The best accounting software can help you track your business debt, manage your cash flow, and better understand your business' financial situation.

What is a healthy bad debt ratio? ›

Lenders prefer bad debt to sales ratios under 0.4 or 40%. However, most companies prefer to have much lower numbers than this. Unless you have no bad debt, there is room to improve.

What is the rule of thumb for debt ratio? ›

Make sure that no more than 36% of monthly income goes toward debt. Financial institutions look at your debt-to-income ratio when considering whether to approve you for new products, like personal loans or mortgages.

What is an ideal debt-to-equity ratio? ›

What is ideal debt/equity ratio? The ideal debt to equity ratio is 2:1. This means that at no given point of time should the debt be more than twice the equity because it becomes riskier to pay back and hence there is a fear of bankruptcy.

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.

What is a healthy ratio for a company? ›

It is computed by dividing current assets by current liabilities. A company enjoying good financial health should obtain a ratio around 2 to 1.

Is 40% a good debt-to-equity ratio? ›

A debt ratio between 30% and 36% is also considered good. It's when you're approaching 40% that you have to be very, very vigilant. With a threshold like that, you're a greater risk to lenders. You may already be having trouble making your payments each month.

Is a debt ratio of 75% good? ›

A debt ratio below 0.5 is typically considered good, as it signifies that debt represents less than half of total assets. A debt ratio of 0.75 suggests a relatively high level of financial leverage, with debt constituting 75% of total assets.

What is the acceptable limit for debt-to-equity ratio? ›

2. 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.

What is a bad debt ratio for a company? ›

The bad debt ratio measures the amount of money a company has to write off as a bad debt expense compared to its net sales. In other words, it tells you what percentage of sales profit a company loses to unpaid invoices.

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