What Is the Debt-to-Equity Ratio?
The debt-to-equity ratio compares how much a company has borrowed with how much its owners have put in. It shows how much the company relies on debt.
How to calculate it
A company has $50 million of debt and $100 million of equity. Its D/E is 0.5. For every dollar from owners, it has borrowed 50 cents.
What is a good debt-to-equity ratio?
Many investors are comfortable below about 1 for most companies. Utilities, telecoms and banks normally carry more debt. Fast-growing software companies often carry very little. Compare within an industry.
Why it matters
Debt boosts returns in good times and adds danger in bad times. Interest must be paid no matter what. A high D/E plus falling profit is a red flag.
A quirk to watch
Big buybacks can shrink equity, sometimes below zero. Then D/E looks huge or even negative, even for healthy companies. Look at debt compared with cash flow as well.
See it in real companies
Open a company to see what it sells and how it makes money.