What Is Considered a High Debt-To-Equity (D/E) Ratio? (2024)

What the D/E Ratio Tells Us About a Company


Jean Folger

What Is Considered a High Debt-To-Equity (D/E) Ratio? (1)

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Jean Folger has 15+ years of experience as a financial writer covering real estate, investing, active trading, the economy, and retirement planning. She is the co-founder of PowerZone Trading, a company that has provided programming, consulting, and strategy development services to active traders and investors since 2004.

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Updated October 03, 2021

Reviewed byAndy Smith

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What Is a High Debt-to-Equity Ratio?

The debt-to-equity (D/E) ratio is a metric that provides insight into a company's use of debt. In general, a company with a high D/E ratio is considered a higher risk to lenders and investors because it suggests that the company is financing a significant amount of its potential growth through borrowing. What is considered a high ratio can depend on a variety of factors, including the company's industry.

Key Takeaways:

  • The debt-to-equity (D/E) ratio reflects a company's debt status.
  • A high D/E ratio is considered risky for lenders and investors because it suggests that the company is financing a significant amount of its potential growth through borrowing.
  • Whether a D/E ratio is high or not depends on many factors, such as the company's industry.

Understanding the Debt-to-Equity (D/E) Ratio

The D/E ratio relates the amount of a firm’sdebt financingto its equity. To calculate the D/E ratio, divide a firm's total liabilities by its total shareholder equity—both items are found on a company's balance sheet. The company’s capital structure is the driver of the debt-to-equity ratio. The more debt a company uses, the higher the debt-to-equity ratio will be.

Debt typically has a lower cost of capital compared to equity, mainly because of its seniority in the case of liquidation. Thus, many companies may prefer to use debt over equity for capital financing. In some cases, the debt-to-equity calculation may be limited to include only short-term and long-term debt. Most often, it also includes some form of additional fixed payments. Together, the total debt and total equity of a company combine to equal its total capital, which is also accounted for as total assets.

Analyzing the Debt-to-Equity (D/E) Ratio by Industry

As is typical in financial analysis, a single ratio, or a line item, is not viewed in isolation. Therefore, the D/E ratio is typically considered along with a few other variables. One of the main starting points for analyzing a D/E ratio is to compare it to other company's D/E ratios in the same industry. Overall, D/E ratios will differ depending on the industry because some industries tend to use more debt financing than others. In the financial industry, for example, the D/E ratio tends to be higher than in other sectors because banks and otherfinancial institutionsborrow money to lend money, which can result in a higher level of debt.

Other industries that tend to have large capital project investments also tend to be characterized by higher D/E ratios. These industries can include utilities, transportation, and energy.

Special Considerations for the Analysis of D/E Ratios

A popular variable for consideration when analyzing a company’s D/E ratio is its own historical average. A company may be at or below the industry average but above its own historical average, which can be a cause for concern. In this case, it is important to analyze the company’s current situation and the reasons for the additional debt.

The weighted average cost of capital (WACC) can provide insight into the variability of a company’s D/E ratio. The WACC shows the amount of interest financing on the average per dollar of capital. The equation also breaks down the average payout for debt and equity.

If a company has a low average debt payout, this implies that the company is obtaining financing in the market at a relatively low rate of interest. This advantage can make the use of debt more attractive, even if the D/E ratio is higher than comparable companies.

What Is Considered a High Debt-To-Equity (D/E) Ratio? (2024)


What Is Considered a High Debt-To-Equity (D/E) 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 considered a high debt-to-equity ratio? ›

The optimal debt-to-equity ratio will tend to vary widely by industry, but the general consensus is that it should not be above a level of 2.0. While some very large companies in fixed asset-heavy industries (such as mining or manufacturing) may have ratios higher than 2, these are the exception rather than the rule.

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 if debt-to-equity ratio is greater than 1? ›

If the company, for example, has a debt to equity ratio of . 50, it means that it uses 50 cents of debt financing for every $1 of equity financing. Firms whose ratio is greater than 1.0 use more debt in financing their operations than equity. If the ratio is less than 1.0, they use more equity than debt.

What is a safe range for debt-to-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 1.0 debt to equity ratio? ›

A debt to equity ratio can be below 1, equal to 1, or greater than 1. A ratio of 1 means that both creditors and shareholders contribute equally to the assets of the business. A ratio greater than 1 implies that the majority of the assets are funded through debt.

What is a good equity ratio? ›

Still, as a general rule of thumb, most companies aim for an equity ratio of around 50%. Companies with ratios ranging around 50% to 80% tend to be considered “conservative”, while those with ratios between 20% and 40% are considered “leveraged”.

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-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 does a 1.5 debt-to-equity ratio 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.

How do you fix a bad debt-to-equity ratio? ›

To lower your company's debt-to-equity ratio, you can pay down loans, increase profitability, improve inventory management and restructure debt.

How do you fix debt-to-equity ratio? ›

Ways to reduce debt-to-equity ratio

One of the most effective ways to do this is to increase revenue. Then, as your company's equity increases, you can use the funds to pay off debts or purchase new assets, thereby keeping your debt-to-equity ratio stable. Effective inventory management is also important.

Is having a high debt-to-equity ratio good? ›

The debt-to-equity (D/E) ratio reflects a company's debt status. A high D/E ratio is considered risky for lenders and investors because it suggests that the company is financing a significant amount of its potential growth through borrowing.

What is the best debt ratio to use? ›

A debt ratio below 30% is excellent. Above 40% is critical. Lenders could deny you a loan.

Can debt-to-equity ratio be more than 100%? ›

A company's debt ratio can be calculated by dividing total debt by total assets. A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt.

What does a debt-to-equity ratio of 1.75 mean? ›

D e b t t o E q u i t y r a t i o = T o t a l l i a b i l i t i e s T o t a l E q u i t y. A value of $1.75, therefore, indicates that for every dollar of equity, a firm uses $1.75 in debt to finance its assets. This ratio indicates that the business has more credit financing than the owner's financing.

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

What does a debt-to-equity ratio of 1.5 mean? A debt-to-equity ratio of 1.5 would suggest that the particular company has $1.50 in debt for every $1 of equity in a business. A debt-to-equity ratio shows how much debt a business has compared to investor equity.

What does a debt-to-equity ratio of 0.8 mean? ›

A debt-to-equity ratio of 0.8 means the firm has $0.80 of debt for every $1 of equity. A debt-to-equity ratio of 0.8 means the firm finances 80 percent of its assets with debt and the other 20 percent with equity.

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