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Debt-to-Equity Ratio: Definition and Meaning
Definition
The debt-to-equity ratio is a leverage measure that compares a company’s liabilities or debt with its equity.
Why It Matters
The ratio can help owners, lenders, investors, and advisors assess how heavily a business relies on borrowed funds relative to owner investment and retained earnings. A ratio that is appropriate for one business may not be appropriate for another, because industries, asset needs, growth stages, debt terms, and cash-flow patterns differ.
The ratio should be considered alongside liquidity, profitability, debt-service capacity, collateral, and the quality of the company’s assets and earnings.
Example
A business has $400,000 in debt and $200,000 in equity. Its debt-to-equity ratio is 2.0.
Related Terms
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