Debt-to-Equity Ratio (D/E) is the metric help us visualize how capital has been raised to finance the operation of the company. D/E Ratio is generally used to evaluate a company’s financial health. A higher number will mean the company is highly leverage, and a lower number will mean the company is less leveraged. Another name for debt-to-equity ratio is risk ratio, or leverage ratio (“Gearing Ratio” for REITs).

Numbers to be considered in Debt-to-Equity Ratio are:

  • Short Term Debt
  • Long Term Debt
  • Fixed Payment Obligations
  • Total Liabilities
  • Total Shareholders’ Equities

Debt-to-Equity Ratio is a relatively good measurement on the risk the company is taking to continue operation.

How is Debt-to-Equity ratio calculated?

The formula for Debt-to-Equity Ratio can be calculated by dividing the total shareholders’ equity by the total liabilities.

Debt-to-Equity Ratio = Total Liabilities/ Total Shareholders’ Equities


Debt-to-Equity Ratio = (Short term debt + Long term debt + Fixed payment obligations) / Shareholders’ Equity

You can generally get these numbers from the balance sheet found in the annual financial report provided by the company.

Interpreting Debt-To-Equity Ratio

Interpretation of the Debt-To-Equity ratio can vary between industry.

Some industry such as the automobile depends heavily on debt, while energy industry usually have lower level of debt.

What does a Debt-To-Equity Ratio of 0.5 mean?

  • D/E of 0.5 means the company uses twice as much of equity to drive growth of the company than it uses debt aka. “borrowed money”. The shareholders/ investors, therefore, own two-thirds of the company’s assets. With D/E of 0.5 or less, the company is generally able to survive any unforeseen black swan events.

What does a Debt-To-Equity Ratio of 1.0 mean?

  • D/E of 1.0 means the company uses just as much of equity to drive growth of the company as it uses debt aka. “borrowed money”. The shareholders/ investors, therefore, own half of the company’s assets. With D/E of 1.0, most company lies in this range.

What does a Debt-To-Equity Ratio of 1.5 mean?

  • D/E of 1.5 the company uses just thrice as much of debt aka. “borrowed money” to drive growth of the company as it uses equity. The shareholders/ investors, therefore, own a quarter of the company’s assets. With D/E of 1.5, the company is using a high level of debt to drive growth.

Editor’s Recommendation: Good Debt vs Bad Debt

What is a Good Debt-To-Equity Ratio?

A good debt-to-equity ratio vary between industry. But the general consensus is that, D/E should not be above the level of 2.0. While some industries which requires high level of fixed-assets such as; mining, manufacturing and transportation may have higher than 2.0. These are exception. Most companies will have a D/E ratio of less than 1.5.

General speaking, you will want a low D/E when compared with the other companies in the industry of those which are of the similar sector.

Average Debt to Equity Ratio by Sector

Ranking Sector D/E Ratio
1 Energy 0.46
2 Capital Goods 0.58
3 Healthcare 0.69
4 Consumer Discretionary 0.75
5 Technology 0.8
6 Basic Materials 0.83
7 Services 1.04
8 Consumer Non Cyclical 1.09
9 Retail 1.09
10 Conglomerates 1.17
11 Utilities 1.27
12 Financial 1.29
13 Transportation 2.79

Source: csimarket

A quick look at the data give us some interesting insight on the performance of different sectors:

  • Sector with lowest average debt-to-equity ratio is Energy.
  • Sector with highest average debt-to-equity ratio is Transportation.

Example On Debt to Equity Ratio

Let’s use an example to understand the calculation of the Debt-To-Equity Ratio formula better.

Susan is a smart low-risk dividend investor who is thinking of investing at ABC Company.

Susan knows that if she do a proper fundamental analysis of the company, she can understand more about the financial health of the company.

Debt-To-Equity Ratio is just one of the many fundamental analysis numbers that Susan need to calculate. This number allows her to have a rough idea on how “risky” it will be to invest into ABC company.

The company has provided the following information in the website:

Information Provided
Short Terms Debt $500
Long Term Debt $1,000
Fixed Payment Obligations $500
Shareholders’ Equity $1,000

What is the Debt to Equity Ratio of the Company?

Debt-to-Equity Ratio is calculated by using the formula given below:

Debt-to-Equity Ratio = (Short term debt + Long term debt + Fixed payment obligations) / Shareholders’ Equity

Debt-to-Equity Ratio = ($500 + $1,000 + $500) / $1,000

Debt-to-Equity Ratio = 2.0

The calculated debt-to-equity ratio of the company is 2.0. The calculated D/E Ratio is more than 1.5 which is high for a low-risk investor like Susan.

Benefits and Limitations


  • Measures Profitability: Debt-to-Equity Ratio help to give an indication of how much profit will be available for the shareholders.
  • Measures Risk: This ratio is one of the best way to measure the level of risk for investing at a company. Higher D/E will generally implies a higher risk. A lower D/E ration will generally indicate a lower risk. By understanding D/E ratio, the investor can decide if investing in the company fit within their risk tolerance level.

Tip: Use Debt-To-Equity Ratio to compare companies that have similar size and industry.


  • Sector/ Industry Dependent: Debt-To-Equity Ratio is very industry specific. Industries which require a larger investment in fixed assets will generally have a higher D/E ratio. Therefore the ratio can only be used to compare within the same industry.

My Takeaway

Debt-to-Equity Ratio is a great tool to measure the financial health of a company. D/E is a preferred way to determine the leverage ratio of the company. Especially in unpredictable times, the D/E can help you in finding companies which can survive through unpredictable black swan events such as Covid 19.

While P/B Ratio is used to find undervalued stocks. Other ratios, such as Quick Ratio, Current Ratio or Cash Ratio are usually used in concurrent to help investors to assess the risk level when investing in a company.

“I’ve seen more people fail because of liquor and leverage, leverage being borrowed money.

You really don’t need leverage in this world much.

If you’re smart, you’re going to make a lot of money without borrowing.”

– Warren Buffett

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Disclaimer: I am not your financial adviser or lawyer, information found in our website are just my opinions and should used for entertainment purpose only. You should always ask your financial adviser or lawyer for any financial or law related advice.

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