Debt-to-Equity Ratio: What It Is and How to Calculate It

By Peter · 23 Sept 2026

The debt-to-equity ratio compares how much of a company is financed by debt versus how much is financed by shareholder equity. It's the other side of the ROE coin: ROE can look great partly because of leverage, and debt-to-equity is the number that tells you how much leverage is actually in play.

The Debt-to-Equity Formula

Debt-to-Equity = Total Liabilities ÷ Shareholder Equity

Both figures come from the balance sheet. Some sources use only interest-bearing debt (loans, bonds) rather than total liabilities (which also includes things like accounts payable and deferred revenue). Either version is valid as long as you're consistent when comparing companies — mixing the two definitions across companies will produce a false comparison.

Worked Example

Say a company's balance sheet shows:

Total liabilities: €60 million
Shareholder equity: €40 million

Debt-to-Equity = €60M ÷ €40M = 1.5 (often written as 1.5x, or 150%)

This means the company has €1.50 of liabilities for every €1 of shareholder equity — more of the business is financed by creditors than by shareholders.

What Counts as a Good Debt-to-Equity Ratio?

As with ROE and the P/E ratio, there's no single healthy number — it depends heavily on the industry:

Capital-intensive businesses (utilities, telecoms, industrials, real estate) routinely run ratios of 1.5–3x or higher. These businesses have predictable, stable cash flows, so lenders are comfortable extending more debt, and the businesses use it to fund expensive infrastructure.
Capital-light businesses (software, many consumer brands) often run below 0.5x, because they don't need much debt-funded infrastructure to operate.
Banks and financial institutions are a special case — their business model is leverage, so comparing their debt-to-equity ratio to a non-financial company is meaningless. They're better judged with sector-specific capital ratios.

A ratio above roughly 2x is often treated as a caution flag for a non-financial, non-utility business, but "caution flag" means "check why," not "avoid automatically." A cyclical or seasonal business, for instance, might carry more debt for reasons tied to its business model rather than financial distress.

Where This Ratio Can Mislead You

It says nothing about whether the company can actually service that debt. A company can carry a "safe-looking" debt-to-equity ratio and still struggle to make interest payments if its cash flow is weak or lumpy. Debt-to-equity is a snapshot of the balance sheet's structure, not a measure of whether the debt is manageable — that requires looking at interest coverage and cash flow separately.

It moves for reasons that have nothing to do with debt. Because shareholder equity is the denominator, anything that shrinks equity — a large buyback, an accumulated loss, a big one-time write-down — pushes the ratio up even if the company hasn't borrowed a single additional euro. Always check why the ratio changed before reading it as "more leverage."

Total-liabilities vs. interest-bearing-debt versions aren't comparable. A company with a lot of accounts payable (common in retail, for instance) will show a much higher total-liabilities ratio than an interest-bearing-debt-only version, without being any more indebted in the way most people mean the word. Check which definition a source is using before comparing across companies.

It's a balance-sheet snapshot, not a trend. A single reading tells you the capital structure at one point in time. Whether that structure is improving or deteriorating matters more than the absolute number — a company steadily paying down debt at 1.8x is in a different position than one steadily borrowing more toward the same 1.8x.

FAQ

What is a good debt-to-equity ratio?

It depends on the industry. Capital-intensive businesses like utilities, telecoms and real estate routinely run 1.5–3x or higher, while capital-light ones like software often sit below 0.5x. Banks are a special case, since leverage is their business model. A ratio above roughly 2x is often treated as a caution flag for other businesses, meaning "check why," not "avoid automatically."

Can the debt-to-equity ratio rise without a company borrowing more?

Yes. Because shareholder equity is the denominator, anything that shrinks equity, such as a large buyback, accumulated losses or a big write-down, pushes the ratio up even if the company hasn't borrowed anything extra. Always check why the ratio changed before reading it as more leverage.