Description
The debt to equity ratio measures the extent to which a company is in debt (referred to as “leverage”), relative to shareholder equity.
Calculation
What it Means
Corporate debt, just like consumer debt, can be a bad thing. Carrying too much relative to shareholders’ equity might indicate that a company has become too leveraged and is in trouble. However, a company can also use a high debt load to create a high level of revenue and profit (thereby increasing equity). In either case, what really matters is not the amount of debt a company has, but how that debt compares to its equity. Keep in mind that debt / equity ratios can vary by industry, so it is important to evaluate this metric in the context of a firm’s peers.