Debt-to-Equity Ratio

The debt-to-equity ratio compares borrowed money to owners’ equity, a leverage gauge.

How investors use it

Compare D/E within an industry and watch the trend. A rising ratio can fund growth, or it can signal a company borrowing to prop up a struggling operation — read the purpose before judging the number.

Worked example

A real-world scenario

Two property developers have the same profits. One runs a D/E of 0.8 and can survive a two-year downturn; the other runs 3.5 and must refinance debt as projects sell slowly. When rates rise, the leveraged developer faces a refinancing crunch while the conservative one simply waits. The scenario is leverage’s double edge: in a boom the aggressive firm’s ROE soars past the conservative one’s, and in a bust it is the first to need a bailout or go bankrupt.

Common confusion

High leverage amplifies both returns and the risk of distress.

Why it matters

It shows how much of the business is funded by creditors versus owners.

Key takeaway

The debt-to-equity ratio is a leverage gauge: how much of the business is funded by creditors versus owners. Higher leverage boosts returns in good times and raises distress risk in bad ones, and “high” depends entirely on the industry. A rising D/E can fund growth or mask a struggling operation, so read the purpose behind the number. Compare within a sector, watch the trend, and remember that leverage amplifies outcomes in both directions.

Definitions reviewed by the Investing Glossary editorial team.