Debt to Equity Ratio (D/E)

Debt to equity ratio (D/E) is a measure of a company's financial leverage. It can be calculated as,

To some extend, a company need to finance its business with debt either for expansion or loan repayment.

Higher D/E usually means the company has been aggressive in financing its growth with debt. This can result the volatile earnings from the additional interest expenses.

And bare in mind, company without debt doesn't necessarily better than company with debt.

Rule of thumb, good debt generates more cashflow, and bad debt doesn't.

Good debts are the money borrowed and spent directly for income-producing activities or assets; while bad debts used to pay off old debts or to increase its owner take home pays, to buy private jet for personal use or to renovate directors' office unnecessarily.

Although D/E have little to do with the growth prospect, it is useful in determining whether the company has strong financial position to survive through a tough time.

By nature of certain industries, you will find that some has high D/E while others might have lower. So, you should compare it to its peers within the same industries.

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Related Financial Ratio

Efficiency Ratio, Liquidity Ratio, Leverage Ratio, Profitability Ratio,

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