Debt-to-Equity
Compares interest-bearing debt with the book value of shareholders' equity.
Formula
Debt-to-Equity = Total Debt / Shareholders' Equity
Worked example$4.6 billion of debt divided by $6.0 billion of equity gives a debt-to-equity ratio of 0.77.
Calculation steps
- Calculate total debt: $4.6 billion.
- Find shareholders' equity: $6.0 billion.
- Divide to get 0.77, or 77%.
How to interpret it
A higher ratio indicates greater financial leverage and potentially greater sensitivity to rates or earnings declines.
Industry context
Appropriate leverage differs sharply across banks, utilities, property companies, manufacturers, and software businesses.
Common mistakes
- Negative or very small equity can distort the ratio.
- Use a consistent debt definition.
- Review cash flow and interest coverage alongside leverage.