What is debt-equity ratio?

Debt-equity ratio is a financial metric that measures a company’s financial leverage by comparing its total debt to shareholders' equity. It indicates how much debt a firm uses to finance its assets relative to equity funding. A high ratio suggests higher reliance on borrowed funds, which may increase financial risk, while a low ratio shows conservative financing with more equity. It is calculated using the formula: Debt-Equity Ratio = Total Debt / Shareholders' Equity. This ratio helps investors, lenders, and analysts assess the firm’s risk profile and financial health. Industry norms vary, so ideal ratios differ across sectors. Proper management of this ratio ensures stability and avoids excessive debt burden.