What is Debt-to-Equity Ratio?

The debt-to-equity ratio (D/E ratio) measures how much debt your business uses compared to its equity (owner investment). It tells lenders and investors how leveraged your business is and whether you rely more on borrowed money or owner capital to fund operations.

How to Calculate Debt-to-Equity Ratio

The formula is straightforward: Debt-to-Equity Ratio = Total Liabilities ÷ Total Shareholder Equity

Both numbers come from your balance sheet. Total liabilities include all debts (short-term and long-term). Shareholder equity is your assets minus your liabilities — essentially what the owners have invested plus retained earnings.

Interpreting the Ratio

What different D/E ratios indicate:

• Below 1.0: More equity than debt — conservative financing, lower risk
• Around 1.0: Equal debt and equity — balanced approach
• Above 2.0: Significantly more debt than equity — higher leverage, higher risk
• Very high (4.0+): Heavy reliance on debt — potential concern for lenders

Industry Variations

What constitutes a "good" D/E ratio varies significantly by industry:

• Capital-intensive industries (manufacturing, utilities): Higher ratios are common and acceptable (2.0+) because of expensive equipment needs
• Service businesses: Lower ratios are typical (0.5-1.5) because they require less capital
• Real estate: Often have high ratios due to property mortgages
• Tech companies: Often have low ratios, especially if venture-funded

Why Lenders Care

Lenders analyze your D/E ratio to assess:

• Whether you can take on additional debt
• How much financial risk you carry
• Whether owners have sufficient "skin in the game"
• Your ability to weather economic downturns
• The likelihood of repayment

Improving Your Ratio

If your D/E ratio is too high for lenders, consider:

• Paying down existing debt before applying for new loans
• Injecting additional equity (owner investment)
• Retaining earnings instead of distributing profits
• Refinancing short-term debt into longer terms