The debt-to-equity ratio compares a business's total debt to its shareholders' equity, measuring how much it relies on borrowing versus owner financing.
The debt-to-equity ratio = total debt ÷ shareholders' equity. It shows how a business is financed: a high ratio means heavy reliance on borrowed money (higher risk and interest cost but potentially higher returns on equity), while a low ratio means the owners fund more of the business themselves.
Lenders use it to judge risk and often set covenant limits, and it is a key solvency measure. The "right" level varies by industry, capital-intensive businesses carry more debt naturally, but a rising ratio signals growing financial risk that both owners and lenders watch.
A company with $300,000 of debt and $200,000 of equity has a debt-to-equity ratio of 1.5, meaning it uses $1.50 of borrowing for every $1 of owner financing.
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