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Glossary
Balance sheet

Debt to equity

How much of the business is funded by lenders rather than owners.

A ratio of 2 means the company owes twice what shareholders have put in. Debt magnifies returns when things go well and destroys equity when they do not, because lenders are paid first and in full.

Acceptable levels vary enormously by industry. A utility with predictable regulated cash flows can carry debt that would destroy a semiconductor company.

The formula
D/E = Total debt ÷ Shareholders' equity
Figure

Why the debt is the engine

Debt 70secured on the targetEquity 30+30%Debt 70, unchangedEquity 60, doubled

Put in 30, borrow 70, secure the loan against the company you are buying. A 30% rise in the business doubles your money. The same arithmetic works in reverse, which is why buyouts fail loudly.

Why it matters

It is the clearest measure of how much room a company has to be wrong.

The mistake everyone makes

Comparing D/E across industries, or ignoring it because ROE looks wonderful. Leverage is why it looks wonderful.

Related terms

ROE
How much profit the company generates on the money shareholders have in it.
Interest coverage
How many times over the company's profits could pay its interest bill.
Leverage
Using borrowed money to increase the size of your position.
Solvency
Whether the company can survive in the long run, given what it owes.

See Debt to equity on a real company

SteadyShares pulls this straight from the filings for 1,100+ companies, alongside moat scores, DCF fair value and peer comparison. Free to look around.

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