Debt/Equity
How much borrowed money vs. shareholder money funds the business. Above 2.0 is heavily leveraged \u2014 fine for utilities, risky for cyclical companies (those whose profits swing with the economy, like automakers or airlines).
Formula
Total Debt / Equity = {debt} / {equity}
Why it matters
Measures financial leverage — how much the company relies on borrowed money vs. its own capital. Higher leverage amplifies both gains and losses, and increases bankruptcy risk.
How to read it
Below 0.5 is conservatively financed. 0.5-1.5 is typical. Above 2.0 signals heavy leverage — acceptable for utilities and REITs, concerning for cyclical businesses. Negative equity (negative D/E) means accumulated losses exceed total invested capital — a serious warning sign. Opler & Titman (1994) found that highly leveraged firms lose substantial market share to healthier competitors during industry downturns — leverage amplifies both upside and downside.
Lessons that use this term
Related terms
Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta
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