What is a good debt-to-equity ratio?

A D/E ratio below 1.0 is generally considered healthy, meaning the company has more equity than debt. However, the ideal ratio varies by sector — utilities and real estate often operate safely above 1.0, while tech companies typically stay well below.

Is a high debt-to-equity ratio always bad?

Not necessarily. Some industries like utilities and real estate naturally carry more debt because of stable cash flows. A high D/E is concerning when combined with weak interest coverage, declining revenue, or rising rates.

How does debt-to-equity differ from interest coverage?

D/E measures the balance between debt and equity on the balance sheet — it shows leverage structure. Interest coverage measures whether operating profit can cover interest payments — it shows debt affordability. Both should be used together.

Debt-to-Equity Ratio: How to Evaluate Financial Leverage in 2026

The debt-to-equity (D/E) ratio is one of the fastest ways to assess how aggressively a company uses borrowed money. Too much debt amplifies risk; too little can mean missed growth. Understanding D/E helps you separate healthy leverage from dangerous overextension.

This article is part of our Complete Guide: How to Analyze a Stock.

What Is the Debt-to-Equity Ratio?

D/E compares a company's total liabilities to its shareholders' equity.


Debt-to-Equity = Total Liabilities / Shareholders' Equity

Key idea: a D/E of 0.5 means the company has $0.50 of debt for every $1 of equity. A D/E of 2.0 means it has twice as much debt as equity.

How to Interpret D/E

D/E Ratio	Interpretation
< 0.5	Conservative — low leverage
0.5–1.0	Moderate — healthy balance
1.0–2.0	Elevated — acceptable in some sectors
> 2.0	Aggressive — higher financial risk

Important: always compare D/E within the same sector. A D/E of 1.5 is alarming for a software company but perfectly normal for a utility.

D/E vs Other Debt Metrics

D/E is just one lens. Combine it with complementary ratios for a full picture.

Metric	What It Measures	Best For
D/E Ratio	Leverage structure (balance sheet)	Overall financial risk
Interest Coverage	Ability to pay interest (guide)	Debt affordability
Debt/EBITDA	Repayment capacity	Leveraged buyouts, credit
FCF Yield	Cash generation vs valuation (guide)	True cash flexibility

Rule of thumb: D/E tells you how much debt exists; interest coverage tells you how easily it can be serviced.

Sector Benchmarks

Typical D/E ranges vary widely because business models differ in capital intensity and cash flow stability.

Sector	Typical D/E	Why
Software / Tech	0.1–0.5	Asset-light, high margins
Consumer Staples	0.5–1.0	Stable cash flows
Industrials	0.5–1.5	Capital-intensive
Utilities	1.0–2.0	Regulated, predictable revenue
Real Estate (REITs)	1.0–3.0	Debt-funded assets, rental income
Financials	2.0–10.0+	Leverage is the business model

Note: Banks and financials are a special case — their entire model is built on leverage, so D/E alone is not meaningful. Focus on capital adequacy ratios instead.

Red Flags to Watch

1. D/E Rising for 3+ Years

A steadily increasing D/E suggests the company is borrowing to fund operations rather than growing organically.

2. High D/E + Low Interest Coverage

This combination is the clearest signal of debt stress. If D/E is above 1.5 and interest coverage is below 3x, dig deeper.

3. Negative Equity

When liabilities exceed assets, equity turns negative — the D/E ratio becomes meaningless. This happens after sustained losses or aggressive buybacks (e.g., McDonald's, Starbucks). Check whether it's structural or a red flag.

4. Rapid Debt Growth Before a Rate Cycle

Companies that loaded up on cheap debt may face refinancing risk when rates rise. Cross-check with maturity schedules.

Practical Checklist

Before investing, run this quick D/E audit:

D/E ratio below sector median
D/E stable or declining over 3 years
Interest coverage above 3x (guide)
No negative equity (unless explained by buybacks)
FCF sufficient to service debt payments
No major debt maturity wall in 12–24 months

How D/E Fits in a Full Analysis

D/E is most powerful when combined with:

Interest Coverage to check debt affordability (read here)
Free Cash Flow to verify the company generates enough cash (read here)
ROIC to ensure borrowed capital earns above its cost (read here)
Volatility & Beta for overall risk profile (read here)

Conclusion

The debt-to-equity ratio is a first-line screening tool for financial risk. It won't tell you everything, but it will quickly highlight companies carrying dangerous leverage — or conservative businesses with room to grow.

Next steps:

Compare D/E across your watchlist peers
Pair D/E with interest coverage for a complete debt picture
Re-check leverage each earnings season

Explore our ${TOTAL_STOCK_COUNT} stock analyses to see debt metrics for real companies.