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  5. Debt-to-Equity (D/E)
Fundamental

Debt-to-Equity (D/E)

Total debt divided by shareholders’ equity — the simplest leverage ratio.

Definition

D/E shows how much debt a company has relative to its shareholder equity base. Higher D/E means more leverage — higher returns when things go well, but more fragility in downturns. Acceptable D/E varies enormously by industry: banks operate at 10x+, capital-intensive utilities at 1-2x, software at 0.1-0.5x, and net-cash companies can have D/E < 0. Trend matters as much as absolute level.

Formula

D/E = Total Debt / Shareholders Equity

Net D/E = (Total Debt - Cash) / Equity

Worked example

A consumer goods company has $3B in debt and $5B in equity: D/E = 0.6. Net of $500M cash, net D/E = 0.5 — moderate leverage. Compare with an LBO carve-out at D/E = 4 and net D/E = 3.7 — much higher refinancing risk.

How ARIA Analyst uses it

ARIA penalises D/E above industry medians in the Solvency Agent and tracks net D/E over time to detect deteriorating balance sheets.

Related terms

  • Return on Equity (ROE)

    Net income divided by shareholders’ equity — profitability per dollar of equity capital.

  • Return on Invested Capital (ROIC)

    NOPAT divided by total invested capital — true return on operating capital, independent of capital structure.

  • EBITDA

    Earnings before interest, taxes, depreciation and amortisation — operating cash earnings proxy.

See Debt-to-Equity (D/E) in action on any asset

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