debttoequity

Debt-to-equity ratio, abbreviated D/E, is a financial metric that compares a company’s total debt to its shareholders’ equity. It is used to assess financial leverage and risk in a company’s capital structure.

Calculation: D/E = total debt / shareholders' equity. Total debt usually includes interest-bearing liabilities such as short-term borrowings and long-term debt. Shareholders' equity comprises common stock, retained earnings, and other equity components. Some analysts distinguish between gross debt (including all interest-bearing obligations) and net debt (gross debt minus cash and cash equivalents).

Interpretation: A higher D/E indicates greater leverage and potential risk of distress if earnings falter, but can also signal efficient use of debt to enhance returns. A lower ratio implies a more conservative structure. Comparisons should be made against industry norms and historical trends.

Uses and limitations: Lenders and investors use D/E to gauge financial risk and to inform lending terms and cost of capital. It does not capture off-balance-sheet liabilities and can be distorted by accounting choices or cyclical earnings. It is not a standalone measure of profitability or solvency.

Variants: In some regions the metric is called gearing. Net debt to equity and other refinements exist. Example: if debt is 200 million and equity is 400 million, D/E equals 0.5.