Debt to equity

Balance sheet

Long-term debt relative to shareholders' equity.

Formula

Debt/equity = long-term debt ÷ shareholders' equity

Why it matters

Leverage amplifies everything: a leveraged business grows equity value faster in good times and destroys it faster in bad times. Debt holders are paid first, so the more debt sits ahead of shareholders, the less margin for error the business has when revenue disappoints or rates rise. Knowing the leverage level is a precondition for interpreting ROE, which debt inflates mechanically.

What good looks like

Below 0.5 is conservative. 0.5–1.5 is normal for mature companies with steady cash flows. Above 2 deserves scrutiny unless cash flows are unusually stable (utilities, consumer staples). The right level depends on business volatility: cyclical businesses should carry little debt precisely because their cash flow cannot be relied upon.

Caveats

Equity is an accounting residual that buybacks and write-downs can shrink toward or below zero, making the ratio explode or turn meaningless at companies that are actually financially strong. That is why we lean more on debt-to-FCF, which compares debt to cash generation rather than to book value. Our figure uses long-term debt only, so short-term borrowings and lease obligations are not included.