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The metric that checks how leveraged a company is — when debt is a real risk, and when it's a perfectly sensible financial tool.
The Debt-to-Equity ratio is a company's total financial debt divided by its shareholders' equity. A ratio of 1.0 means debt equals equity in size; a ratio of 2.0 means there's twice as much debt as equity — higher leverage.
Financial debt (unlike issuing shares) is usually a cheaper source of financing, especially when interest rates are low — and interest on debt is tax-deductible, making it even cheaper in practice. A company that uses debt wisely to fund profitable growth can boost the return on shareholders' equity. Debt isn't inherently the enemy.
The problem starts when operating income doesn't safely cover interest payments (see the 'interest coverage' metric), or when a company's industry is volatile and sensitive to downturns — then high debt can turn into a real liquidity crisis the moment things slow down. A 'reasonable' ratio depends heavily on the industry: a utility with stable revenue can carry far more leverage than a tech startup.
Debt-to-equity is one of the metrics in the Fundamental category (20% of the score), always checked together with the current ratio and interest coverage — to get a full picture of financial health, not a single leverage number without context.
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The information in this guide is intended for general educational purposes only and does not constitute investment advice. Full details on the disclaimer page.