What Is A Good Debt To Equity Ratio? (2024)

Last Updated: April 07, 2024

Disclaimer: We are not qualified legal or tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.

When exploring your financial landscape, especially in the context of securing loans or managing business finances, the term "debt to equity ratio" frequently pops up as a key indicator of financial health. But what exactly is this ratio, and why does it matter for your financial strategy and debt management?

Understanding the nuances of the debt to equity ratio is crucial for anyone looking to make educated decisions about leveraging debt in relation to their equity. This blog post aims to demystify this financial metric, providing clear definitions and insights into what constitutes a good debt to equity ratio and how it can impact your financial decisions and opportunities.

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What is Equity?

Equity, for people, is what you have that is worth money or that has grown in value. Homes are the most common types of equity. If you have a mortgage of $150,000 and the house is valued at $200,000, you have $50,000 in equity. Your total equity is all your assets minus liabilities.

Cars and boats generally don't have equity as they lose value over time. Stocks, jewelry, artwork, and similar items may or may not have equity. It depends on how much you bought it for and how much someone is willing to pay for it.

If you are would like more information on what a good debt to equity ratio is, contact us for yourFREE consultationtoday. See how much money you can save with our debt settlement program.

What are Assets?

An asset is like equity but includes your after-tax income. We are going to use asset and equity to mean the same thing. This is because most people do not have a lot of equity but do have assets. Since the formulas are used in business, the terms remain the same in personal finance where your total assets are value of everything you own.

When calculating your financial health, one important measure to consider is your debt to asset ratio. This ratio compares the total amount of debt you owe to the total value of your assets. A lower debt to asset ratio suggests that you have more assets relative to your debts, which is generally a favorable financial position. Conversely, a higher ratio indicates you have more debt compared to your assets, which could signal financial risk.

What is Debt?

Debt is what you owe. Loans, credit cards, mortgages, student loans, and similar items feed into debt. It can be divided into long and short term obligations or debt, like mortgages and short term debt that is due within a year. Adding those together gives you total debt.

What is Debt to Equity Ratio?

A ratio compares one value to another. The debt to equity ratio compares how much debt you have to how much equity you have.

  1. Calculate all your assets
  2. Calculate all your debts
  3. Subtract debts from assets to get net worth
  4. Divide total debt by net worth

This should give you a number less than one. If it is more than one, you have more debt than assets or you have made an error.

For instance, you owe $100,000 and have total assets of $200,000. $100,000/$200,000 = 0.5 Multiply this by 100 to get a percentage. Your debt to equity ratio is 50%.

Alternatively, if you have total debts of $200,000 and equity of $100,000 (200,000/100,000), you have a debt to equity ratio of 2 or 200%.

The lower the debt to equity percentage, the better you are situated. The person in the first example is in a better finance place than person 2.

If you are not fond of math, there are online calculators that will help you figure out your company's total debt due to equity ratio.

What is a debt to asset ratio?

A debt to asset ratio is like a debt to equity ratio, except your after tax income is added into your equity. Most lenders use debt to asset ratio as a clearer look at debt to equity ratio. This adds in your after-tax income for a better idea of how easily you can to borrow money repay your debts.

Why Do I Need A Good Debt to Asset Ratio?

You can figure out debt to assets two ways. The first is all debt except mortgage. The second is with a mortgage. Let's break it down with some numbers.

Debt to asset without mortgage

Add together all debts (loans, credit lines, credit cards, etc.) and divide by after tax income. Let's say you have $10,000 in debts and an after-tax income of $59,000 (the median US income). Your debt ratio is 0.17 or 17%.

Debt to asset with mortgage

Add together all debts plus the total of 12 monthly mortgage payments and divide by after tax income. Using the same example, you have $10,000 in debt plus $12,360 (based on US averages) in mortgage payments and the after-tax income of $59,000 Your debt ratio is now 0.38 or 38%.

Your debt to asset ratio can give you a clearer picture of your overall financial health than the debt to equity ratio, as it takes into account all your assets, not just equity. Lenders often use this ratio to determine your ability to repay a loan. A lower ratio means you have more assets relative to your debt, which can make you a more appealing borrower.

What is a Good Debt to Equity Ratio?

Now that you have some numbers, what do they mean? The ideal debt to equity ratio, using the formula above, is less than 10% without a mortgage and less than 36% with a mortgage.

If you exceed 36%, it is very easy to get into debt. 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. Having a debt to asset ratio above this threshold could make it more difficult to obtain loans or favorable interest rates.

High and low debt to equity ratios

When you look at debt to equity ratios, a high ratio means you probably don't have enough equity to cover your debts.

A very low ratio also means you can take advantage of your equity to take out loans if you want.

A high ratio is anything over 40% or 0.4.

A low ratio is less than 36% (0.36) with a mortgage or 10% (0.1) without a mortgage.

People often have questions about specific debt to equity ratios. Let's answer them here.

  1. Is it better to have a higher or lower debt-to-equity ratio?
    Answer: A lower debt to equity ratio is better.
  2. Is a debt-to-equity ratio below 1 GOOD?
    Answer: It means you have more assets than debt.
  3. Is 0.4 debt-to-equity ratio good?
    Answer: This is also 40%. It is not very good.
  4. What does a debt-to-equity ratio of 2.5 mean?
    Answer: It means you have 2.5 times the debt as assets.
  5. Is 1.7 A good debt-to-equity ratio?
    Answer: You have 1.7 times the debt as assets
  6. Is 0.5 a good debt-to-equity ratio?
    Answer: It is higher than banks like to see.
  7. What does a debt-to-equity ratio of 0.8 mean?
    Answer: You have almost more debt than you do assets
  8. Is 10% a good debt-to-income ratio?
    Answer: Yes. It is very good.
  9. Is a debt-to-equity ratio of 75% good?
    Answer: No. It is too high.

How to Improve your Debt to Equity Ratio

To improve your debt to asset ratio, you could focus on reducing your debts and/or increasing your assets. This could involve paying down loans, credit card balances, or other forms of debt, as well as increasing your savings or investments to grow your assets. It's important to approach this process gradually and sustainably, focusing on strategies that fit your financial situation and goals.

What if I can't improve my debt to equity ratio?

If you have credit card debt in excess of $10,000 and are having trouble paying it down, Pacific Debt, Inc may be able to help you out.

Contact one of our debt specialists for afree consultation.

Disclaimer: We are not attorneys or accountants and can not give you legal advice. If you have legal or tax questions, you should contact the appropriate expert.

Some Business Terminology

Whether you are an individual or small business owner, this concept applies to both. It's good to know what these terms mean.

Balance Sheet

A company's balance sheet details assets, liabilities, and shareholders' equity at a specific point in time. The balance sheet can indicate a company's financial health and where changes need to be made. Look online to find a balance sheet template. Before you invest, you may want to see the company's balance sheet.


Capital is the money or assets available to a company and is known as the company's equity. Companies may raise additional capital by offering stock. Some companies are in financial and manufacturing industries considered capital intensive industries. These capital intensive companies are ones that require land, buildings or plants, equipment, vehicles, or heavy equipment.

Cash flow

A company's cash flow looks at the amount of cash in and cash out. Cash flow can indicate the health of a a company finances. Companies also have a cash ratio that considers the cash or assets that can be turned quickly into cash versus debt.


Liabilities are the company's debt load. Assets minus liabilities can indicate the health of a company or financial distress of a family. A company's total liabilities are all the debts and commitments owed to a third party.

Financial leverage

A company's important financial metric of leverage is using a company's debt to buy assets. Debt to equity ratio is a form of leverage ratio.


A company's assets include cash, inventory, buildings, and property added to the intangible assets. Assets minus liabilities yields the net worth of a company personal assets.

Corporate finance

Corporate finance looks are sources of financing, corporate capital structure, actions that increase the value of the company's short term leverage back to the shareholders, and the tools used to allocate financial resources.

Finance operations provide financial advice and guidance to a company. Equity financing is the ownership of assets with attached liabilities. Finance growth is a method of mixing existing debt, and equity to entice lenders to lend money. Debt financing is selling bonds, bills or notes to raise capital. People have more debt financing options like credit card debt and loans from family.

Shareholders equity

The total shareholder equity is the amount of money that would be returned to shareholders if the company was liquidated. Total shareholders equity represents the net worth of equity shareholders in the company.

Disclaimer: We are not attorneys or accountants and can not give you legal advice. If you have legal or tax questions, you should contact the appropriate expert.

  • What is the debt-to-equity ratio (D/E ratio)?

    The debt-to-equity ratio is a financial metric used to evaluate a company's level of financial leverage. It measures the proportion of a company's debt relative to its equity, indicating the degree to which a company is financed by debt versus equity.

  • How is the debt-to-equity ratio calculated?

    The debt-to-equity ratio is calculated by dividing a company's total liabilities (debt) by its total shareholders' equity. The formula is: Debt-to-Equity Ratio = Total Liabilities / Shareholders' Equity.

  • What does a high debt-to-equity ratio indicate?

    A high debt-to-equity ratio typically indicates that a company has been financing its operations primarily through debt rather than equity. While high leverage can amplify returns during periods of growth, it also increases the company's financial risk, making it more vulnerable to economic downturns or changes in interest rates.

  • What does a low debt-to-equity ratio indicate?

    A low debt-to-equity ratio suggests that a company relies less on debt financing and has a stronger equity base. While a low ratio may indicate financial stability and lower risk, it could also imply that the company is not taking full advantage of leverage to grow its operations.

  • What is considered a good debt-to-equity ratio?

    The interpretation of a "good" debt-to-equity ratio varies across industries and depends on factors such as the company's business model, growth stage, and risk tolerance. In general, a debt-to-equity ratio of 1 or lower is often considered conservative, indicating a balanced mix of debt and equity financing. However, what is considered acceptable can differ significantly between industries and individual companies.

  • How does the debt-to-equity ratio impact investors?

    Investors use the debt-to-equity ratio to assess a company's financial health and risk profile. A higher ratio may make a company less attractive to investors due to increased financial risk and potential difficulties in meeting debt obligations. Conversely, a lower ratio may signal financial stability and a stronger ability to weather economic challenges.

  • Can the debt-to-equity ratio be too low?

    While a low debt-to-equity ratio is generally viewed positively, an extremely low ratio may indicate that a company is overly reliant on equity financing, potentially missing out on opportunities to leverage debt for growth or tax benefits. Investors need to consider the context of the ratio within the company's industry and growth objectives.


Understanding your debt-to-equity ratio is more than a numerical exercise; it's a crucial step towards financial health and strategic planning, whether for personal finances or within a business context. A good debt-to-equity ratio reflects a balance between debt and equity, indicating a solid foundation for managing financial obligations and supporting growth.

While the ideal ratio may vary depending on individual circ*mstances and industry standards, aiming for a ratio that lenders and investors consider healthy is essential. Remember, a lower debt-to-equity ratio generally signifies less reliance on borrowed funds, offering more stability during economic downturns.

However, leveraging debt wisely can also be a powerful tool for growth and expansion when used responsibly. If your ratio is higher than desired, consider strategies to reduce debt or increase equity to improve your financial standing.

If you are struggling with overwhelming debt and want to explore your debt relief options, Pacific Debt Relief offers afree consultationto assess your financial situation. Our debt specialists can provide objective guidance relevant information and support to help find the right debt relief solution.




*Disclaimer: Pacific Debt Relief explicitly states that it is not a credit repair organization, and its program does not aim to improve individuals' credit scores. The information provided here is intended solely for educational purposes, aiding consumers in making informed decisions regarding credit and debt matters. The content does not constitute legal or financial advice. Pacific Debt Relief strongly advises individuals to seek the counsel of qualified professionals before undertaking any legal or financial actions.

What Is A Good Debt To Equity Ratio? (2024)


What Is A Good Debt To Equity Ratio? ›

Generally speaking, a debt-to-equity ratio of between 1 and 1.5 is considered 'good'. A higher ratio suggests that debt is being used to finance business growth. This is considered a riskier prospect. But really low ratios that are nearer to 0 aren't necessarily better.

What is a good debt-to-equity ratio? ›

The optimal D/E ratio varies by industry, but it should not be above a level of 2.0. A D/E ratio of 2 indicates the company derives two-thirds of its capital financing from debt and one-third from shareholder equity.

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.

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 a debt-to-equity ratio of 40% 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.

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.

What is a good debt to ratio? ›

A general rule of thumb is to keep your overall debt-to-income ratio at or below 43%. This is seen as a wise target because it's the maximum debt-to-income ratio at which you're eligible for a Qualified Mortgage —a type of home loan designed to be stable and borrower-friendly.

What is a 2.5 debt-to-equity ratio? ›

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.

Is 0.1 a good debt ratio? ›

A company's debt ratio can be calculated by dividing total debt by total assets. A debt ratio that's less than 1 or 100% is considered ideal, while a debt ratio that's greater than 1 or 100% means a company has more debt than assets.

Is a debt ratio of 0.4 good? ›

Interpreting the Debt Ratio

Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low. However, what constitutes a “good debt ratio” can vary depending on industry norms, business objectives, and economic conditions.

Is 100% debt to equity good? ›

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 rupee invested in the company, about 66 paise comes from debt, while the remaining 33 paise comes from the company's equity.

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

Apple Debt to Equity Ratio: 1.410 for March 31, 2024.

What is too high of a 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 is a healthy 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.

What is the optimal debt ratio? ›

Do I need to worry about my debt ratio? If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.

Is a .9 debt-to-equity ratio good? ›

An ideal debt to equity ratio is generally somewhere between 1 and 2 — Yet this all depends on the industry the business operates in. For example, capital-intensive sectors such as the manufacturing industries may require a larger amount of debt to finance their operations compared to an online business.

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.

Is 75% a good debt ratio? ›

By calculating the ratio between your income and your debts, you get your “debt ratio.” This is something the banks are very interested in. A debt ratio below 30% is excellent. Above 40% is critical. Lenders could deny you a loan.

What is a 1.5 debt-to-equity ratio? ›

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 20% a good debt ratio? ›

Ideally, financial experts like to see a DTI of no more than 15 to 20 percent of your net income. For example, a family with a $250 car payment and $100 of monthly credit card payments, and $2,500 net income per month would have a DTI of 14 percent ($350/$2,500 = 0.14 or 14%).

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