Balance sheet
Debt to Equity
Debt to equity measures how much of the financing comes from lenders relative to owners.
Leverage amplifies both ways. Debt that costs less than the return on capital raises ROE and can be rational. Debt that comes due in a bad year is how solvent businesses become headlines. The ratio is a starting size check: equity of $10 billion and debt of $30 billion is a different company from one with those numbers reversed.
Always ask what the debt is for and when it matures. A net-cash software firm and a utility with regulated assets should not be held to the same ceiling. Interest coverage tells you whether current profit can pay the coupon. Debt to equity tells you how large the coupon's source is. Use them together.
Formula
Debt to equity = total debt ÷ shareholders' equity
Live example
Apple Inc. (AAPL) last printed at $345.33 with a market cap of $5.04T. Apply the formula on this page to that live price. Where the quote is missing an input, the stock page's financials are the next place to read it.
Related
Interest Coverage · Current Ratio · Return on Equity (ROE)
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Questions
Is all debt bad?
No. Refusing all debt can leave returns on the table. Debt that cannot be refinanced, or that funds a return below its cost, is the problem.
Should I use net debt?
Net debt subtracts cash. A company with large cash and large gross debt is not as levered as the gross ratio suggests. Look at both.