Debt-to-Equity Ratio: How to Judge a Company's Financial Risk

The debt-to-equity (D/E) ratio compares what a company has borrowed with what shareholders have invested.

D/E = Total debt ÷ Shareholders' equity

A D/E of 0.5 means the company has 50 cents of debt for every dollar of equity.

Interpreting D/E

• Low D/E: more conservative financing and more flexibility in downturns.
• High D/E: more financial risk, especially when interest rates rise — see how the Fed moves stocks.

Norms differ by industry. Utilities, banks and REITs routinely carry more debt than software companies.

Better Together: Related Measures

• Net debt to EBITDA: how many years of operating earnings it would take to repay debt.
• Interest coverage: operating income ÷ interest expense. Below about 2–3x can be a warning sign.
• Debt maturities: when debt comes due, disclosed in the 10-K.