Debt-to-Equity Ratio Calculator & Formula (2025 Guide)

If you apply for a loan to expand inventory, open a new brick-and-mortar store, or launch a new product line, your bank will ask for one key metric: your debt-to-equity ratio.

In other words, the bank will want to know how much of your business was financed through borrowing versus owner investment.

Whether you’re applying for a business loan, seeking investors, or planning long-term growth, understanding your debt-to-equity (D/E) ratio is essential to your success. To calculate your D/E, you need a simple but powerful formula that helps you (and others) assess your company’s financial health.

In this guide, we’ll explain how the debt-to-equity ratio works, how to calculate it, and how to use it to make smarter financial decisions for your business.

Debt-to-equity ratio calculator

Total Liabilities:

Shareholder’s Equity:

What your D/E ratio means

• Less than 1.0
  
  
• Your business is primarily financed through equity.
• Typically indicates lower financial risk.
• May improve your chances of securing loans without personal guarantees.
• Could suggest you’re under-leveraging and have room to borrow for growth.
  
  
• Between 1.0 and 2.0
  
  
• Shows a balanced mix of debt and equity financing.
• Generally seen as a healthy range for most industries.
• Suggests you’re using debt strategically while staying in control.
• Keep an eye on your cash flow and repayment timelines.
  
  
• Greater than 2.0
  
  
• Your business relies heavily on debt.
• Can signal higher financial risk to lenders and investors.
• May result in higher interest rates or personal guarantees on loans.
• Make sure your revenue and working capital are strong enough to support this level of debt.

What is the debt-to-equity ratio?

The debt-to-equity (D/E) ratio measures how a business finances its operations, by borrowing money (debt) or using owner/investor funds (equity). You can calculate it by dividing the company’s total liabilities by shareholder equity.

A low D/E ratio means the business relies less on debt and is usually a sign of lower financial risk. A high D/E ratio means the business carries more debt, which can be riskier but also fuel faster growth if managed well.

What’s considered “high” or “low” depends on your industry. For example, real estate companies often operate with higher D/E ratios than ecommerce startups. Always compare your ratio to similar businesses for the most useful insight.

D/E ratio definition for businesses

In a business context, the D/E ratio reflects financial leverage, solvency, and risk. It shows how dependent a company is on borrowed funds to operate and grow. Unlike personal finance, where debt is often a red flag, strategic use of debt in business can support expansion, if the returns outweigh the risk.

D/E ratio vs other financial metrics

While the D/E ratio focuses on long-term financial structure, other metrics offer different insights:

• Current ratio and quick ratio look at short-term liquidity which is how easily a business can cover immediate expenses.
• Debt ratio measures total debt relative to total assets, not just total equity.
• Interest coverage ratio tracks how well a company can meet its interest payments from operating income.

Use the D/E ratio when you want to understand how leveraged your business is, especially when planning for growth, funding, or risk management.

How to calculate the debt-to-equity ratio: step-by-step guide

It’s simple to calculate the debt-to-equity ratio with this formula:

Debt-to-equity ratio = Total liabilities ÷ Shareholder equity

Here’s how to do it:

1. Find your total liabilities. This includes all short-term and long-term debts, like loans, accounts payable, and other financial obligations. You’ll find this number on your company’s balance sheet.
2. Find your shareholder equity. This is what’s left after subtracting liabilities from your company’s assets. It includes common stock, retained earnings, and paid-in capital—also found on the balance sheet.
3. Divide liabilities by equity. Plug in the numbers to get your ratio. The result is usually a decimal or whole number. Multiply by 100 if you want to show it as a percentage.

What counts as debt in D/E ratio

In a D/E ratio calculation, “debt” typically includes both short- and long-term financial obligations. These are the items your business is expected to repay, either soon or over time. 

Common examples include:

• Short-term liabilities (due within a year)
• Long-term liabilities (due in more than a year)
• Accounts payable
• Accrued liabilities (e.g., unpaid wages or taxes)
• Deferred tax liabilities
• Bonds payable
• Mortgages payable
• Leases and financing agreements
• Contingent liabilities (such as pending legal settlements or guarantees)

Not all liabilities are created equal. Short-term debts are more immediate but often smaller. Long-term debts represent bigger commitments and can weigh more heavily on your financial health. 

When reviewing your D/E ratio, look closely at the types of debt included—they impact how leveraged your business truly is.

Debt-to-equity ratio calculation examples

Here are examples of how to calculate the debt-to-equity ratio in two common business scenarios:

Example 1: Home goods Shopify store

A business selling home goods has:

• Total liabilities: $250,000
• Shareholder equity: $750,000

Debt-to-equity ratio = $250,000 ÷ $750,000 = 0.33 (or 33%)

This means the business owes 33¢ in debt for every $1 of equity.

Example 2: Service-based business

A freelance design agency has:

• Total liabilities: $100,000
• Shareholder equity: $200,000

Debt-to-equity ratio = $100,000 ÷ $200,000 = 0.5 (or 50%)

This business owes 50¢ in debt for every $1 of equity.

Lower ratios typically suggest less financial risk, but always compare your numbers to industry benchmarks to get the full picture.

What is a good debt-to-equity ratio by industry?

There’s no one-size-fits-all answer when it comes to a “good” D/E ratio. What’s considered healthy can vary widely depending on your industry and growth strategy.

For example:

• Tech startups often have low D/E ratios because they rely heavily on equity funding.
• Manufacturing or utility companies tend to carry more debt to fund equipment and infrastructure, so higher D/E ratios are more common and acceptable.
• Retail businesses may fall somewhere in between, depending on how they scale.

Industry benchmarks and standards

Here’s a look at typical D/E ranges across industries, based on 2025 data from FullRatio:

Pro tip: Don’t compare your D/E ratio to companies in unrelated industries. Instead, benchmark against businesses with similar operating models, funding structures, and growth stages.

Where to find industry averages

If you want to dig deeper, here are reliable sources to check industry averages:

• FullRatio: Free, up-to-date benchmarks by industry
• NYU Stern (Aswath Damodaran): Academic data on capital structures across sectors
• Yahoo Finance/Google Finance: Look up public companies in your niche and check their financials
• IBISWorld or Statista: Industry-specific reports (some require a subscription)
• Your accountant or CFO: They may have access to private databases and tailored insights

The advantages of using the debt-to-equity ratio

The debt-to-equity ratio gives you a quick snapshot of how your business is funded, and how balanced your finances are between debt and equity. It’s especially useful for ecommerce businesses that need to borrow to grow.

Tracking your D/E ratio over time can help you:

• Understand your financial risk
• Maintain a healthy balance between borrowing and ownership
• Make better decisions around expansion, investment, or restructuring

High levels of debt can be risky, especially in a volatile market. A well-managed D/E ratio helps you stay in control, avoid overleveraging, and strengthen your long-term financial health.

How lenders use D/E ratio

If you’re applying for a loan, your D/E ratio is one of the first metrics a lender will review. It helps them gauge how much debt you’re already carrying, and whether you can take on more.

A lower D/E ratio generally means:

• You’re not overly reliant on borrowed money
• You’re more likely to meet repayment obligations
• You may qualify for better terms or higher loan amounts

Lenders also use the ratio to monitor business solvency over time. If your D/E ratio rises too quickly, it could signal financial instability, even if your revenue is strong.

D/E ratio for investment decisions

Investors and venture capitalists use the D/E ratio to assess a company’s risk profile before putting in money. A well-balanced ratio signals smart financial management and increases your chances of securing outside capital.

If you’re raising funds through equity financing, investors want to see how much equity is already in play. A very high D/E ratio can be a red flag, suggesting too much debt and not enough owner investment.

The D/E ratio also plays a role in leveraged buyouts (LBOs). In these scenarios, the acquiring company might fund 70$ to 90% of the deal with debt and the rest with equity. Understanding your D/E ratio helps you assess whether a buyout or acquisition is financially viable.

Limitations of debt-to-equity ratio

While the debt-to-equity (D/E) ratio is a valuable financial metric, it’s important to know its limitations when analyzing your business’s financial health. 

Here are some fundamental limitations to consider:

Industry differences

When comparing your D/E ratio to benchmarks, make sure you’re using industry-specific data. Each industry has different standard D/E ratios. 

For example, capital-intensive industries like manufacturing may naturally have higher D/E ratios than an ecommerce business. What’s considered acceptable in one industry may be viewed as risky in another. 

Balance sheet timing

The D/E ratio is based on the balance sheet, which is a snapshot of your company’s financial standing at a specific point in time. Fluctuations in liabilities or equity that occur after the balance sheet date may, therefore, not be accounted for. Seasonal businesses might have significant variations in their D/E ratio depending on when you or your accountant prepare your balance sheet.

Quality of debt

When analyzing your D/E ratio, it’s essential to consider the quality and terms of your debt. The D/E ratio doesn’t differentiate between types of debt (for example, short term versus long term or high interest versus low interest). Some forms of debt are riskier than others, and the standard D/E ratio doesn’t account for or represent this. 

Equity valuation

The ratio uses the book value of equity, which may not accurately reflect the current market value. This can lead to an undervaluation or overvaluation of your company’s true financial leverage. The ratio can also include significant intangible assets with subjective values that can fluctuate and affect its reliability.

Growth stage

When comparing your D/E ratio to benchmarks, consider your company’s growth stage and adjust expectations accordingly. Companies at different stages of growth might naturally have different D/E ratios. Startups might have higher ratios due to initial funding needs, while mature companies might have lower ratios due to established revenue streams.

Profitability and cash flow

The D/E ratio doesn’t consider profitability or your business’s ability to generate cash flow. A high D/E ratio might still be acceptable if you have solid and stable net cash flows. The ratio also neglects to account for off-balance-sheet debts, which can impact your company’s proper financial leverage. 

Alternative financial metrics to D/E ratio

The standard debt-to-equity (D/E) ratio gives you a full picture of your business’s overall leverage. But sometimes, it’s helpful to zoom in on just the long-term debt.

Long-term debt to equity ratio

This version of the D/E ratio focuses only on long-term liabilities, such as bank loans, bonds, or mortgages due in more than a year, and compares them to shareholder equity.

Formula:

Long-term debt-to-equity ratio = Long-term liabilities ÷ Shareholder equity

This ratio is especially useful when:

• You want to assess your long-term financial stability
• You need to separate day-to-day immediate obligations from bigger funding decisions
• Lenders or investors are more concerned with how you’re managing large, ongoing debts

Because it excludes short-term liabilities like accounts payable, this metric gives a clearer view of how much long-term risk your business is carrying. It’s a smart tool for planning major investments or evaluating your ability to scale sustainably.

IBD to EBITDA ratio

Another way to evaluate your business’s leverage is by using the interest-bearing debt (IBD) to EBITDA ratio.

Formula:

IBD to EBITDA ratio = Interest-bearing debt ÷ EBITDA

• Interest-bearing debt (IBD) includes any loans or credit lines that require interest payments.
• EBITDA stands for earnings before interest, taxes, depreciation, and amortization, a measure of your business’s operating performance.

This ratio shows how easily your business can repay its existing debts using its core earnings. A lower IBD to EBITDA ratio suggests your business generates enough income to comfortably manage its debt load.

It’s a useful tool when:

• You want to assess how sustainable your debt is in relation to your profit margins
• You’re preparing for financing and want to demonstrate repayment capacity
• You’re comparing performance across companies with different tax or capital structures

Because it focuses on interest-bearing debt, this metric zeroes in on obligations that directly impact your cash flow.

Impact on ROE and WACC

Your debt-to-equity (D/E) ratio plays a key role in shaping how profitable and efficient your business appears to investors and lenders. Two important metrics it affects are return on equity (ROE) and weighted average cost of capital (WACC).

Return on equity (ROE)

ROE measures how efficiently a business uses shareholder equity to generate profits. A higher D/E ratio can boost ROE in the short term because borrowed funds may help grow the business without diluting ownership.

But there’s a tradeoff: If debt costs rise or profits dip, your ROE can quickly fall, making the business appear riskier to investors.

Weighted average cost of capital (WACC)

WACC represents the average cost of raising money through both debt and equity. Debt is usually cheaper than equity because interest is tax-deductible, so taking on some debt can lower your WACC.

However, too much debt increases financial risk, which may drive up your overall cost of capital. Finding the right balance in your D/E ratio helps keep your WACC low while maintaining financial flexibility.

Bottom line: Managing your D/E ratio wisely helps you improve profitability (ROE) and reduce funding costs (WACC), both crucial for long-term growth.

What does your D/E ratio mean for your business?

Beyond just showing how your business is financed, your debt-to-equity ratio offers insight into how well you can manage and repay debt. It’s a key signal for lenders, investors and for you as a business owner.

D/E ratio and debt servicing ability

The debt-to-equity (D/E) ratio helps you understand how your business is financed, through debt or equity and how well positioned you are to manage that debt.

A high D/E ratio means your business relies more heavily on borrowing. That’s not always a red flag, especially for capital-intensive or rapidly growing companies, but it can signal a higher financial risk. If sales dip or market conditions shift, businesses with high D/E may struggle to meet their debt obligations.

On the flip side, a very low D/E ratio could indicate under-leveraging, which might limit your ability to scale or invest in growth. The goal is balance: using debt strategically without overextending your business.

Regularly monitoring your D/E ratio, alongside other financial metrics can help you spot potential issues early and adjust your financing strategy as needed.

Personal guarantees and small business risk

For small business owners, a high D/E ratio can trigger more than just lender caution, it may lead to personal guarantees on loans. That means if your business can’t repay its debt, you could be held personally responsible.

This is especially relevant for startups and sole proprietors who may not have significant assets or a long financial track record. A high D/E ratio increases perceived risk, and lenders often respond by shifting that risk to the business owner.

That’s why it’s important not only to track your D/E ratio, but also to understand the personal financial implications that come with taking on debt. Keeping your ratio in check can help protect both your business and your personal finances.