Debt to Equity Ratio Calculator
What Is the Debt to Equity Ratio?
The debt to equity ratio measures how much of a business is financed by debt compared to owner equity. It tells lenders, investors, and business owners how leveraged the business is — how much of its asset base is owned outright versus borrowed.
A high debt to equity ratio means the business relies heavily on debt to finance its operations and assets. That amplifies returns when things go well but increases risk when they don't. A low ratio means the business is primarily funded by owner equity, which is more conservative but may also mean the business is not using available leverage to grow.
The Formula
Debt to Equity Ratio = Total Liabilities / Shareholders' Equity
Definitions
Total liabilities includes all debt and obligations the business owes — both current liabilities due within the next 12 months and long-term liabilities due beyond 12 months. This includes accounts payable, accrued expenses, loans, lines of credit, equipment financing, and any other obligations.
Shareholders' equity is total assets minus total liabilities. It represents the owners' stake in the business — retained earnings, paid-in capital, and any other equity accounts.
A Worked Example
A commercial HVAC contractor has the following balance sheet:
Total assets: $3,400,000
Total liabilities: $2,100,000
Shareholders' equity: $1,300,000
Debt to Equity Ratio = $2,100,000 / $1,300,000 = 1.62
For every dollar of owner equity, this contractor has $1.62 of debt. The business is more debt-financed than equity-financed.
What Is a Good Debt to Equity Ratio?
Acceptable levels vary significantly by industry. Capital-intensive industries like manufacturing, construction, and real estate routinely operate with higher ratios because they require significant assets to generate revenue. Service businesses typically run lower ratios. As a general reference point, a ratio below 1.0 means the business has more equity than debt. Between 1.0 and 2.0 is common for many industries. Above 2.0 starts to draw scrutiny from lenders.
Most lenders have specific debt to equity thresholds written into loan covenants. Know your covenant requirements and track this ratio against them.
Debt to Equity and Financial Risk
Leverage works in both directions. A contractor who finances equipment and working capital with debt can take on more work and generate higher returns on equity than one who waits to save the cash. But if revenue drops or margins compress, the debt payments remain fixed. That is the fundamental tradeoff of leverage — it magnifies both the upside and the downside.