Debt-to-Equity Ratio
A measure of financial leverage comparing debt to equity.
The debt-to-equity ratio measures how much a company relies on borrowed money versus owner investment to fund its operations. A higher ratio indicates greater financial leverage and risk. What's acceptable varies by industry—capital-intensive businesses like manufacturing typically have higher ratios than service businesses. Lenders use this ratio to assess borrowing capacity.
Formula
Debt-to-Equity Ratio = Total Liabilities ÷ Total EquityExample
A business with $200,000 in total debt and $300,000 in equity has a debt-to-equity ratio of 0.67, meaning it uses 67 cents of debt for every dollar of equity—generally conservative.
Why It Matters for Your Business
A high debt-to-equity ratio means the business is heavily leveraged, increasing risk during downturns and limiting future borrowing capacity.
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