Debt-to-equity ratio.
In plain English
The debt-to-equity ratio compares money owed to money owned. You divide total debt, or in some versions total liabilities, by shareholders' equity. A ratio of 1.0 means lenders and owners have put in equal amounts. Higher ratios mean fixed interest payments take a bigger bite before owners see anything, which magnifies both good years and bad ones. What counts as normal varies enormously by industry, so the ratio only means something against peers or against the same company over time.
01Why it matters
Financial leverage cuts both ways, and this ratio is the quickest read on how much of a company's future profit is already promised to lenders before shareholders get a claim on it.
02The math, step by step
A company carries $600 million of debt against $400 million of shareholders' equity. $600 million divided by $400 million is a ratio of 1.5, meaning lenders have funded $1.50 of the business for every $1.00 from owners.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Debt-to-assets divides borrowings by everything the company owns, so it can never exceed 1.0 for a solvent firm. Debt-to-equity divides by the smaller owners' slice and can run far above 1.0. Same borrowings, very different-looking numbers.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice