What Is the Debt-to-Equity Ratio?
Formula, how to interpret it, and why definitions differ.
Home › Accounting Glossary › Debt-to-Equity Ratio
| Type | Gearing (leverage) ratio |
|---|---|
| Uses | Liabilities and equity from the balance sheet |
| Topic | Financial accounting · Solvency ratios |
Debt-to-equity ratio in plain English
A business can fund itself with owners’ money or with borrowed money. A higher ratio means more of the funding is borrowed, which increases risk because interest and repayments must be met whatever the profit. It can also boost returns to owners when borrowing is used well.
Worked example
A business has total liabilities of 40,000 and equity of 50,000.
Debt-to-equity = 40,000 ÷ 50,000 = 0.8. For every 1.00 of owners’ equity, the business owes 0.80 to others.
- Using different definitions without saying so. Some books use total liabilities, others use only interest-bearing debt. State which one you use.
- Calling a high ratio automatically bad. What is acceptable depends on the industry.
Frequently asked questions
What does a high debt-to-equity ratio mean?
The business is financed more by borrowing than by owners’ equity, which means higher financial risk.
Is there one correct formula?
No. Some sources use total liabilities, others use only borrowings such as loans and bonds. Check which one your syllabus uses.
What is a good debt-to-equity ratio?
It depends on the industry and the business. Compare with similar businesses and with its own past results.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.