The D/E ratio shows the balance between borrowed money and equity financing. It compares a company’s total debt to its total shareholder equity, giving a clear view of how the business funds its operations and growth. A higher ratio means the company relies more on debt. A lower ratio means it depends more on equity.
Companies use debt because it can be cheaper than issuing new shares, but too much debt increases financial risk. The best D/E ratio depends on the industry. Capital-intensive industries like airlines or utilities often operate with higher ratios, while technology or service companies usually keep lower ratios.
Analysts study D/E trends over time to understand how a company’s risk level is changing. Rising debt may help growth in the short term but can create pressure during weaker economic periods. A stable or declining D/E ratio can signal stronger financial control and healthier long-term planning.
The D/E ratio helps investors and lenders judge how risky a company is. It shows whether the company can manage its debt, support growth, and remain stable during market changes.
A healthy ratio depends on the industry. Some industries naturally use more debt, while others operate with very little. In general, lower ratios indicate lower financial risk. Extremely high ratios may signal that a company could struggle to meet its debt obligations, especially during economic downturns. Analysts always compare D/E to peers in the same sector for accurate evaluation.
Banks and lenders review the D/E ratio before approving loans. Companies with reasonable ratios usually receive better interest rates and more favorable terms because they appear less risky. Firms with very high ratios may face higher borrowing costs or strict lending conditions.
Changes in the D/E ratio show whether a company is taking on more debt or reducing it. A rising ratio may reflect aggressive expansion or financial stress. A falling ratio may indicate improved earnings, lower borrowing needs, or stronger balance sheet management. These trends help investors judge long-term stability.
A company has $300 million in total debt and $200 million in shareholder equity. Its D/E ratio is 1.5, meaning it uses $1.50 of debt for every $1.00 of equity.
