Debt-to-Equity Ratio
Debt-to-equity measures how much of a company is financed by debt versus shareholders' equity.
A high D/E ratio means the company has borrowed heavily relative to its equity base, amplifying both returns in good times and losses in downturns. Capital-intensive industries like utilities and telecoms routinely carry high D/E; technology companies often have very low debt.
Not all debt is equal: long-term, fixed-rate debt at low interest rates is far less risky than short-term, floating-rate obligations that must be refinanced frequently. Reading the notes to the accounts reveals the structure.
Net debt (total debt minus cash) is often more informative than gross debt, because a company sitting on £1bn of cash is in a very different position to one with no cash at all.
Example
A company with £600m in debt and £400m in equity has a D/E of 1.5×.
Further Reading
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Jack Bogle's case for low-cost index funds, in under 300 pages.
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