Glossary · UK
What is Debt-to-Equity Ratio?
A closely related measure to gearing that expresses total debt directly as a multiple of shareholder equity.
Full Definition
The debt-to-equity ratio compares a business's total interest-bearing debt directly against its shareholder equity, expressed as a ratio or multiple (for example, 0.67, or "0.67 times") rather than as the percentage-of-total-capital figure used for the gearing ratio -- the two measures are closely related and often used somewhat interchangeably in everyday conversation, but are not numerically identical, so it is worth checking which formula a specific source is using before comparing figures between companies or industries. A debt-to-equity ratio above 1 means a business has more debt than equity funding it, while a ratio below 1 means equity funding exceeds debt; as with gearing, higher figures amplify both potential returns to shareholders and financial risk if trading conditions worsen, and acceptable levels vary hugely by sector, with asset-heavy industries such as property, utilities and infrastructure typically operating comfortably with much higher ratios than a services business with few physical assets to borrow against. Lenders commonly build maximum debt-to-equity or gearing covenants into loan agreements, and investors and analysts use the ratio, alongside interest cover and cash flow measures, to judge whether a company's borrowing level looks sustainable or is starting to look stretched relative to its equity base and sector peers.
How Debt-to-Equity Ratio is calculated
Debt-to-equity ratio = Total debt / Shareholder equity- Total debt
- All interest-bearing borrowing, e.g. loans and finance leases.
- Shareholder equity
- Share capital plus retained earnings and reserves.
Worked example: A company with GBP 200,000 of debt and GBP 300,000 of shareholder equity has a debt-to-equity ratio of 200,000 / 300,000 = 0.67, meaning it has 67 pence of debt for every GBP 1 of shareholder equity.