The debt-to-equity (D/E) ratio is a financial metric that compares a company's total debt to its total shareholders' equity. It indicates how much of the company's financing comes from debt versus equity.
The formula is: D/E Ratio = Total Debt / Total Shareholders' Equity. For example, if a company has $2 million in debt and $4 million in equity, its D/E ratio is 0.5. A higher ratio means the company relies more heavily on borrowed money, which increases financial risk.
A D/E ratio above 1.0 generally means the company has more debt than equity, which could be risky during economic downturns. However, some industries like utilities and real estate naturally operate with higher D/E ratios. Investors use this ratio to assess a company's financial health and compare it with industry peers before making investment decisions.