When assessing D/E, it’s also important to understand the factors affecting the company. This means that for every dollar in equity, the firm has 76 cents in debt. To get a sense of what this means, the figure needs to be placed in context by comparing it to competing companies. 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.

In most cases, this is considered a very risky sign, indicating that the company may be at risk of bankruptcy. A debt ratio greater than 1.0 (100%) tells you that a company has more debt than assets. Meanwhile, a debt ratio of less than 100% indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company’s risk level.

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Restoration Hardware’s cash flow from operating activities has consistently grown over the past three years, suggesting the debt is being put to work and is driving results. Additionally, the growing cash flow indicates that the company will be able to service its debt level. As an example, the furnishings company Ethan Allen (ETD) is a competitor to Restoration Hardware. 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.

Loan Calculators

Determining whether a debt-to-equity ratio is high or low can be tricky, as it heavily depends on the industry. In some industries that are capital-intensive, such as oil and gas, a “normal” D/E ratio can be as high as 2.0, whereas other sectors would consider 0.7 as an extremely high leverage ratio. The debt-to-equity ratio (D/E) is calculated by dividing the total debt balance by the total equity balance. However, a low D/E ratio is not necessarily a positive sign, as the company could be relying too much on equity financing, which is costlier than debt. In general, if a company’s D/E ratio is too high, that signals that the company is at risk of financial distress (i.e. at risk of being unable to meet required debt obligations). The debt-to-equity ratio belongs to a family of ratios that investors can use to help them evaluate companies.

A lower D/E ratio suggests the opposite – that the company is using less debt and is funded more by shareholder equity. On the other hand, when a company sells equity, it gives up a portion of its ownership stake in the business. The investor will then participate in the company’s profits (or losses) and will expect to receive a return on their investment for as long as they equity equation hold the stock.

Since equity is equal to assets minus liabilities, the company’s equity would be $800,000. Its debt-to-equity ratio would accounting succession planning estate planning wealth management family offices therefore be $1.2 million divided by $800,000, or 1.5. Financial data providers calculate it using only long-term and short-term debt (including current portions of long-term debt), excluding liabilities such as accounts payable, negative goodwill, and others. The periods and interest rates of various debts may differ, which can have a substantial effect on a company’s financial stability. In addition, the debt ratio depends on accounting information which may construe or manipulate account balances as required for external reports. The concept of comparing total assets to total debt also relates to entities that may not be businesses.

1. Debt-financed growth may serve to increase earnings, and if the incremental profit increase exceeds the related rise in debt service costs, then shareholders should expect to benefit.
2. While the total debt to total assets ratio includes all debts, the long-term debt to assets ratio only takes into account long-term debts.
3. In the majority of cases, a negative D/E ratio is considered a risky sign, and the company might be at risk of bankruptcy.
4. Conversely, a debt level of 40% may be easily manageable for a company in a sector such as utilities, where cash flows are stable and higher debt ratios are the norm.

How to Calculate Debt to Equity Ratio (D/E)

The investor has not accounted for the fact that the utility company receives a consistent and durable stream of income, so is likely able to afford its debt. And, when analyzing a company’s debt, you would also want to consider how mature the debt is as well as cash flow relative to interest payment expenses. Some investors also like to compare a company’s D/E ratio to the total D/E of the S&P 500, which was approximately 1.58 in late 2020 (1). It’s useful to compare ratios between companies in the same industry, and you should also have a sense of the median or average D/E ratio for the company’s industry as a whole.

Retention of Company Ownership

The loan is said to be invested in the Mexican and Colombian markets that will target technology development and product innovation, attract talent, and build up its customer base. Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom. If you want to express it as a percentage, you must multiply the result by 100%. Upon plugging those figures into our formula, the implied D/E ratio is 2.0x.

If interest rates are higher when the long-term debt comes due and needs to be refinanced, then interest expense will rise. From the above, we can calculate our company’s current assets as $195m and total assets as $295m in the first year of the forecast – and on the other side, $120m in total debt in the same period. Lenders and debt investors prefer lower D/E ratios as that implies there is less reliance on debt financing to fund operations – i.e. working capital requirements such as the purchase of inventory. The formula for calculating the debt-to-equity ratio (D/E) is equal to the total debt divided by total shareholders equity. A D/E ratio of about 1.0 to 2.0 is considered good, depending on other factors like the industry the company is in. But a D/E ratio above 2.0 — i.e., more than $2 of debt for every dollar of equity — could be a red flag.