Discover how tracking your D/E ratio helps finance leaders balance aggressive business expansion with long-term financial stability.
Patrick Evenden
Head of Thought Leadership, EMEA
Workday
The debt-to-equity ratio, often abbreviated as the D/E ratio, is a financial leverage ratio comparing a company’s total liabilities with its shareholders’ equity. It shows how much debt the organisation uses for every dollar of equity.
Together, debt and equity make up the core of a company’s capital structure. A higher debt-to-equity ratio indicates more reliance on borrowed funds, while a lower ratio means a larger share of the company is financed through equity.
Debt can provide companies with the capital needed to expand operations, invest in technology, enter new markets, or make acquisitions without issuing additional shares. Used effectively, it can support growth and enhance shareholder returns.
But debt also creates fixed financial obligations. Principal and interest payments must be made regardless of revenue performance, which can reduce flexibility when cash flow weakens or the interest rate environment causes borrowing costs to rise.
The debt-to-equity ratio helps leaders understand this trade-off. It is commonly used to:
Together, these insights help finance leaders connect capital structure decisions to broader financial operations, from liquidity planning and debt management to investment prioritisation.
Debt can provide companies with the capital needed to expand operations, invest in technology or make acquisitions.
The standard formula for calculating the debt-to-equity ratio is:
Debt-to-Equity Ratio = Total Liabilities ÷ Shareholders’ Equity
Both figures can typically be found on the company’s balance sheet. Total liabilities include the financial obligations the company owes, while shareholders’ equity reflects its total assets minus those liabilities.
Follow these four steps to complete the debt-to-equity calculation:
1. Determine total liabilities
2. Determine shareholders’ equity
Before you can gauge how heavily a company relies on borrowed money, you need to tally up everything it owes. Start by locating the company’s current and non-current liabilities on the balance sheet:
If the balance sheet doesn’t provide a grand total, simply add the current and non-current liabilities together. Being thorough at this stage ensures accurate results and saves you from having to backtrack later.
Next, look at the other side of the coin to see how much of the business is truly owned outright by its investors. Locate total shareholders’ equity on the same balance sheet and for the same reporting period. Depending on the organisation, equity may include common stock, additional paid-in capital, retained earnings, accumulated other comprehensive income and treasury stock.
Mixing figures from different time frames will distort your ratio, leaving you with an inaccurate picture of the company’s true capital structure. That’s why using consistent, time-stamped data is essential.
With both halves of the equation in hand, crunching the final number reveals the balance between debt and ownership. To do so, divide total liabilities by total shareholders’ equity. You can express the final result as either a decimal or a traditional ratio.
For example, consider a company with the following balance-sheet figures:
First, calculate total liabilities:
£1.5 million + £2.5 million = £4 million
Then apply the debt-to-equity formula:
£4 million ÷ £5 million = 0.8
In this scenario, the company has a debt-to-equity ratio of 0.8, or 0.8:1. In practical terms, that means it holds 80 cents in liabilities for every dollar of shareholders’ equity.
Keep in mind that context is everything in corporate finance, and tweaking what counts as “debt” can give you a very different perspective. Some analysts calculate the ratio using only interest-bearing debt rather than total liabilities. This variation may exclude operating obligations such as accounts payable and accrued expenses:
Debt-to-Equity Ratio = Interest-Bearing Debt ÷ Shareholders’ Equity
For example, if the company above has £3 million in short- and long-term interest-bearing debt, its ratio under this method would be:
£3 million ÷ £5 million = 0.6
Neither approach is inherently superior; rather, each serves a different analytical goal. The total-liabilities method offers a broader look at overall financial obligations, while the interest-bearing-debt method zeros in on financial leverage. Ultimately, finance teams should clearly define their chosen methodology and stick to it consistently across all analysis and comparisons.
Peer comparisons are most useful when the companies have similar operating models and apply the same definition of debt.
The D/E ratio offers a baseline for capital structure, but driving action requires context. What qualifies as a good debt to equity benchmark varies significantly by industry. Before deciding whether a ratio reflects healthy growth or rising risk, finance leaders must weigh cash flow, strategy, industry norms and historical trends.
Industry benchmarks add vital perspective: capital-intensive sectors naturally carry more debt than asset-light models, making like-for-like peer comparisons essential. Peer comparisons are most useful when the companies have similar operating models and apply the same definition of debt.
Finance leaders must also evaluate the ratio against internal targets, loan covenants and historical trends. A sudden spike isn’t always caused by new debt – it can just as easily stem from operating losses or share buybacks that shrink the equity base. Pinpointing the root cause reveals whether a shift aligns with your broader capital strategy or signals mounting financial strain.
The value of the debt-to-equity ratio extends beyond the calculation itself. Tracked over time, it helps finance leaders identify changes in leverage early and evaluate how borrowing, earnings, acquisitions or shareholder distributions are affecting the company’s financial position.
Connected financial management and planning systems make that analysis more timely and useful by supporting financial modelling and forecasting across capital scenarios. They can also model how potential decisions, such as taking on a new loan, issuing shares or funding an expansion, would affect leverage before capital is committed.
Used this way, the debt-to-equity ratio becomes a practical guardrail for capital planning. It helps leaders determine how much financial risk the company can responsibly carry while preserving the flexibility needed to invest, adapt and grow.
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