It’s advisable to consider currency-adjusted figures for a more accurate assessment. Here, “Total Debt” includes both short-term and long-term liabilities, while “Total Shareholders’ Equity” refers to the ownership interest in the company. The interest paid on debt also is typically tax-deductible for the company, while equity capital is not. As established, a high D/E ratio points to a company that is more dependent on debt than its own capital, while a low D/E ratio indicates greater use of internal resources and minimal borrowing.

Specific to Industries

We can see below that for Q1 2024, ending Dec. 30, 2023, Apple had total liabilities of $279 billion and total shareholders’ equity of $74 billion. Gauging if you’re within the typical range of your competitors is useful to a business owner. If your company’s debt-to-equity ratio is high, but is within average industry range, then there’s no need to worry. But if it’s particularly higher or lower than that industry standard, it might be worth interrogating your finances further – particularly if you’re looking for investment.

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It’s clear that Restoration Hardware relies on debt to fund its operations to a much greater extent than Ethan Allen, though this is not necessarily a bad thing. This figure means that for every dollar in equity, Restoration Hardware has $3.73 what are sundry expenses definition meaning example in debt. The following D/E ratio calculation is for Restoration Hardware (RH) and is based on its 10-K filing for the financial year ending on January 29, 2022. As noted above, the numbers you’ll need are located on a company’s balance sheet.

• The debt to equity ratio is a financial, liquidity ratio that compares a company’s total debt to total equity.
• This number represents the residual interest in the company’s assets after deducting liabilities.
• Generally speaking, a debt-to-equity ratio of between 1 and 1.5 is considered ‘good’.
• As a measure of leverage, debt-to-equity can show how aggressively a company is using debt to fund its growth.
• Sectors requiring heavy capital investment, such as industrials and utilities, generally have higher D/E ratios than service-based industries.
• In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to meet its debt obligations.

Industry Norms

This number can tell you a lot about a company’s financial health and how it’s managing its money. Whether you’re an investor deciding where to put your money or a business owner trying to improve your operations, this number is crucial. This issue is particularly significant in sectors that rely heavily on preferred stock financing, such as real estate investment trusts (REITs).

Formula and Calculation of the D/E Ratio

Increase revenue and use the new equity to either buy new assets or pay off existing debts. One of the limitations of this ratio is that the computation is based on book value, as it is sometimes useful to calculate these ratios using market values. Investors often scrutinize the Debt to Equity ratio before making investment decisions. A company with a high ratio might be seen as risky, whereas one with a lower ratio could be viewed as more stable. Different sectors have varying norms, and it’s essential to compare against industry averages. As you can see, company A has a high D/E ratio, which implies an aggressive and risky funding style.

Step 1: Identify Total Debt

While this can lead to higher returns, it also increases the company’s financial risk. When evaluating a company’s debt-to-equity (D/E) ratio, it’s crucial to take into account the industry in which the company operates. Different industries have varying capital requirements and growth patterns, meaning that a D/E ratio that is typical in one sector might be alarming in another. Capital-intensive sectors, such as utilities and manufacturing, often have higher ratios due to the need for significant upfront investment. In contrast, industries like technology or services, which require less capital, tend to have lower D/E ratios. Generally, a ratio below 1 is considered safer, while a ratio above 2 might indicate higher financial risk.

Depending on the industry they were in and the D/E ratio of competitors, this may or may not be a significant difference, but it’s an important perspective to keep in mind. It’s also worth checking that you aren’t maintaining more inventory than you need. Different analysts in different countries can use the same name – for example leverage ratio in different ways. There is no generally accepted definition, so be careful you know what the particular analyst or firm’s standard definition is. In this guide, we’ll explain everything you need to know about the D/E ratio to help you make better financial decisions.

While the D/E ratio is primarily used for businesses, the concept can also be applied to personal finance to assess your own financial leverage, especially when considering loans like a mortgage or car loan. If a company has a D/E ratio of 5, but the industry average is 7, this may not be an indicator of poor corporate management or economic risk. There also are many other metrics used in corporate accounting and financial analysis used as indicators of financial health that should be studied alongside the D/E ratio. A company’s management will, therefore, try to aim for a debt load that is compatible with a favorable D/E ratio in order to function without worrying about defaulting on its bonds or loans. This debt to equity calculator helps you to calculate the debt-to-equity ratio, otherwise known as the D/E ratio.

Basically, the more business operations rely on borrowed money, the higher the risk of bankruptcy if the company hits hard times. The reason for this is there are still loans that need to be paid while also not having enough to meet its obligations. But let’s say Company A has $2 million in long-term liabilities, and $500,000 in short-term liabilities, whereas Company B has $1.5 million in long-term debt and $1 million in short term debt.

The 10-K filing for Ethan Allen, in thousands, lists total liabilities as $312,572 and total shareholders’ equity as $407,323, which results in a D/E ratio of 0.76. The debt-to-equity ratio is a way to assess risk when evaluating a company. The ratio looks at debt in relation to equity, providing insights into how much debt a company is using to finance its operations. The quick ratio measures the capacity of a company to pay its current liabilities without the need to sell its inventory or acquire additional financing.