Which investing ratio measures a company’s debt relative to shareholders’ equity?

The debt-to-equity ratio measures a company’s debt relative to shareholders’ equity.

It is commonly calculated by dividing total liabilities, or a specified measure of debt, by shareholders’ equity. The exact definition can vary: some analysts use total debt, while others include all liabilities. A higher result generally indicates that more creditor financing supports the company relative to owner financing, but the meaning depends heavily on the industry and accounting conventions.

Debt can help a company expand without issuing as many shares, and interest payments may provide tax benefits in some jurisdictions. However, borrowing also creates required payments and can increase financial risk, especially when revenue falls or interest rates rise. A debt-to-equity ratio should therefore be examined with interest coverage, cash flow, maturity dates, and profitability.

Comparisons are most useful among similar businesses. Banks, utilities, manufacturers, and technology companies naturally use different financing structures. The ratio also differs from the debt-to-assets ratio, which compares debt with total assets rather than shareholders’ equity.