Debt-to-equity ratio: Definition & Example

Debt-to-equity ratio

The debt-to-equity ratio is total liabilities divided by shareholders’ equity, both taken from the balance sheet. It shows how much a business relies on creditors compared with the owners’ own investment and retained earnings. A higher ratio means more of the business is financed by debt, which increases risk if revenue falls.

Sora Accounting & Tax · General information · Editorial policy
Updated October 24, 2026 · 2 min read

What the ratio measures

Debt-to-equity ratio = total liabilities ÷ total shareholders’ equity. BDC describes it as one measure of debt capacity, alongside the debt service coverage ratio and the debt-to-total-assets ratio. Lenders use it to judge whether a business could take on more borrowing, usually by comparing it with other businesses in the same sector.

A company financed mostly by debt is described as highly leveraged. If revenue declines, it may struggle to repay what it owes and to borrow more. BDC also notes that a very low ratio can reflect an overly cautious approach to investing, so lower is not automatically better.

An illustrative example

Imagine a corporation with $150,000 of total liabilities, made up of a bank loan, supplier balances and sales tax owing, and $100,000 of shareholders’ equity. Its debt-to-equity ratio is $150,000 ÷ $100,000, or 1.5, meaning $1.50 of debt for each $1 of equity. The numbers are illustrative only.

If the owner retains $25,000 of profit and pays down $25,000 of the loan, liabilities fall to $125,000 and equity rises to $125,000, so the ratio becomes 1.0. The change comes from both sides of the formula, which is why you should watch both.

Pitfalls when comparing numbers

Not everyone uses the same definition of debt. BDC advises that you specify which method you use to measure debt, since a related ratio divides total liabilities by total assets instead of by equity. Lenders may also treat items such as a shareholder loan differently in their own analysis, so ask how yours is handled.

Equity can be negative. BDC explains that equity is negative when liabilities exceed assets, often called a deficit. In that case the ratio is not meaningful in the usual sense, and a lender will look at other information instead.

What to discuss with your accountant

Ask how your liabilities and equity are classified, whether owner loans are shown separately, and which ratio definition your lender or loan agreement uses. If you plan to borrow, ask what range is typical for your industry and what you could change before applying.

Bring your latest balance sheet, loan statements and any covenant terms. Because the ratio reflects a single date, compare it across several year-ends and read it with your cash-flow forecast, not on its own.

Sources & editorial notes

Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.

Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.