Debt-to-Equity Ratio: How Much Debt Is Too Much?

Debt is not bad. Almost every company you have heard of borrows money, and plenty of them borrow a lot without ever coming close to trouble. What hurts shareholders is debt the business cannot carry when trading gets worse. The debt-to-equity ratio is the first, rough way to see how much of a company is paid for with borrowed money, and the rest of this guide is about what it hides.

What the debt-to-equity ratio measures

A company pays for everything it owns with two kinds of money. Some comes from lenders: banks, bondholders, anyone who expects to be paid back with interest on a fixed schedule. The rest belongs to the shareholders, either because they put it in when shares were issued or because the company kept profits instead of paying them out. The debt-to-equity ratio, often written D/E, puts the first kind on top of the second. The difference between the two matters because they behave very differently in a bad year. Shareholders can be asked to wait: if profits disappear, the dividend can be cut and nobody can force the company to pay it. Lenders cannot be told to wait. Interest is due on a date, the loan has to be repaid or refinanced on a date, and missing those dates can hand control of the company to the creditors. The more of the business rests on borrowed money, the less room the shareholders have before that happens.

How to work it out, with an example

In words: take the company's total borrowings and divide them by total shareholders' equity. Say Company A has borrowed 300 million, in bank loans and bonds added together, and its balance sheet shows 500 million of shareholders' equity. Three hundred divided by five hundred gives 0.6. You will also see it written as 60%. Either way, it means lenders have put in 60 cents for every euro or dollar that belongs to the owners.

Equity here is the accounting figure, the one at the bottom of the balance sheet, not the market value of the shares. It is the same number that sits behind book value per share. That choice has consequences later in this guide, because accounting equity can be shrunk by things that have nothing to do with how healthy the business is. Be warned, too, that sources do not agree on the top half. Some divide total liabilities by equity, which drags in money owed to suppliers, taxes due and customer deposits. Others count only borrowings that carry interest. The first version gives a much bigger number for the same company. Neither is wrong, and this guide uses the narrower borrowings version, but you cannot compare a figure from one website with a figure from another unless you know which recipe each one used, and many data sites never say.

Net debt: why the cash pile changes the picture

Go back to Company A and suppose it also holds 100 million in cash and short-term deposits. In principle it could repay a third of its borrowings tomorrow. Subtract the cash from the debt and you get net debt: 300 minus 100 is 200 million. Divide that by the same 500 million of equity and the net debt-to-equity ratio is 0.4. Some companies hold more cash than they owe. Their net debt is negative, which simply means they have a net cash position. In British English the word gearing is a common name for this idea, usually net debt as a share of equity, so a gearing of 40% would match the 0.4 above. Do check the definition in each report, though, because companies and data sites do not all calculate gearing the same way (some use total capital instead of equity). Net debt is also the bridge to a wider view of what a company is worth. Add it to the market value of the shares and you get roughly the enterprise value, the price of the whole business including what it owes. Why that changes how a company looks is the subject of enterprise value versus market cap.

Interest cover: can the profits carry the debt?

The debt-to-equity ratio compares two balance sheet numbers. It does not tell you whether the company earns enough to pay for its borrowing, and that is the question lenders care about most. Interest cover answers it. Take operating profit, often labelled EBIT (earnings before interest and taxes), and divide it by the interest expense for the same year.

Say Company A made 60 million of operating profit and paid 15 million in interest. Sixty divided by fifteen gives an interest cover of 4: profits could fall by three quarters before they no longer cover the interest bill. Now imagine its loans come up for renewal when rates are higher and the interest bill doubles to 30 million. Cover drops to 2. If a weak year then pulls operating profit down to 40 million, cover is 1.3, and very little stands between the shareholders and a hard conversation with the bank. The debt-to-equity ratio did not move at all in that story.

That is why the two ratios belong together. The interest rate a company pays on its loans is its cost of debt, and it tends to rise as borrowing piles up, because lenders charge more for more risk. Look for the maturity schedule in the notes too: a modest amount of debt that all falls due next year can be more awkward than a larger amount spread over fifteen years.

Why some industries run on debt

A water, electricity or gas network is the classic heavy borrower. Its revenue is steady because people keep paying their bills in a recession, prices are often set or reviewed by a regulator, and its assets (pipes, cables, power stations) last for decades. Lenders are comfortable lending against that kind of predictable income, so a debt-to-equity ratio well above 1 can be normal for the sector. Property companies and infrastructure owners work the same way, borrowing against buildings and toll roads that produce rent or fees year after year.

Banks are a different animal, and the usual ratio barely applies to them. Borrowed money is not a side effect of a bank's business; it is the business. Customer deposits are liabilities, and a bank lends them out again. Measured the ordinary way, almost every bank looks enormously indebted. Banks are judged instead on regulatory capital ratios that regulators set and banks publish, which are a separate subject. Insurers have a similar problem, because the money they hold for future claims sits on the liabilities side.

At the other end, a software company, a consultancy or a brand owner usually needs little debt. Its main assets are people and ideas, which a bank cannot repossess, and its income can drop sharply if customers leave. A ratio that is ordinary for a utility could be a real worry there. The fair comparison is always with the company's own history and with the few businesses that genuinely do the same thing.

When the ratio misleads

Negative equity breaks the ratio entirely. Equity turns negative when total liabilities exceed total assets on the books, and the ratio then comes out as a minus figure that means nothing. There are two very different ways to get there. One is years of losses eating through the shareholders' money, which is a serious warning. The other is a company that has spent heavily on buying back its own shares, sometimes with borrowed money, which reduces accounting equity even while the business keeps earning well. Say Company B has 400 million of debt and, after years of buybacks, equity of minus 50 million. Its debt-to-equity ratio is minus 8, a number you cannot rank against anything. For a company like that, interest cover and debt compared with cash flow tell you far more.

Leases are a second trap. Since 2019, companies reporting under IFRS show most leases (shops, offices, aircraft) as liabilities on the balance sheet. Some data providers count those lease liabilities as debt and some leave them out, so a retailer or an airline can show two very different ratios depending on where you look. A third trap is timing: the balance sheet is a snapshot taken on one day, and a company that collects cash just before year end can show less net debt on that date than it carries for the rest of the year.

Finally, low debt is not automatically a virtue. A company with no debt at all is not automatically stronger: borrowing can be a cheaper way to fund growth than issuing shares, which feeds into the overall cost of capital, and a shrinking business can show a falling ratio simply because it has stopped investing. The direction over five years usually tells you more than any single year. Rising debt while profits stay flat is a question worth asking; rising debt that paid for assets now earning money is a different story.

Where to find the figures in an annual report

Everything starts on the balance sheet, sometimes called the statement of financial position. Borrowings are usually split into current (due within a year) and non-current (due later), and you add both together. Cash and cash equivalents sit at the top of the assets. Total equity is at the bottom; if there is a line for non-controlling interests, check whether your source includes it, because some do and some do not. Interest expense is on the income statement, often inside a line called finance costs, and the notes to the accounts list each loan with its rate and repayment date. Many companies also publish their own net debt figure in the front of the report; it is worth reading how they define it. For the cash side of the story, the cash flow statement shows whether the company produces enough free cash flow to pay debt down without borrowing more.

Debt is only one part of a company's balance sheet health. Short-term liquidity, meaning whether current assets cover the bills due in the next twelve months, is the job of the current ratio, which the calculator below works out for you. And the debt figure feeds straight into valuation, as the guide to valuation metrics explains.

Putting the debt numbers to work

A sensible routine takes ten minutes per company. Work out debt to equity, then net debt to equity, then interest cover. Do it for the last five years, not just the latest one. Then set the result next to two or three companies in the same industry. If the numbers are out of line, read the debt note and find out why. Often there is a plain reason, such as an acquisition paid for with loans that are already being repaid. Sometimes there is not, and that is worth knowing too.

On the Worthmap stock analysis page you can look up these figures for real companies, alongside a score out of 36 from fixed rules in six areas, financial strength among them. It is a checklist result, not a tip to buy or sell.

For information and education only, not a recommendation to buy or sell any security.

Written by

Federico Romaldi

Co-Founder, Worthmap

Published: October 31, 2026

Federico is a co-founder of Worthmap, a multi-currency net worth tracker with free investing calculators. He writes the site’s articles on value investing, fundamental analysis and tracking wealth held in several currencies. He is not a licensed financial adviser.