Definition
The D/E ratio measures a company's financial leverage by comparing total debt obligations to equity. Higher ratios indicate greater reliance on debt financing, which amplifies both returns and risks. Industry norms vary widely: utilities and REITs typically carry higher D/E than tech companies.
functions Formula
D/E = Total Liabilities / Shareholders' Equity
lightbulb Example
A company has $40M in total debt and $50M in equity: D/E = 0.8x. Industry average is 1.2x, suggesting this company is conservatively financed with room to take on strategic debt.
verified_user Key Points
- Above 2.0 generally considered highly leveraged
- Industry context is critical for interpretation
- Net D/E subtracts cash from debt for clearer picture
- Rising D/E trend may signal increasing financial risk