what does the d e ratio tell you 
the d e ratio measures how much debt a company has taken on relative to the value of its assets net of liabilities debt must be repaid or refinanced imposes interest expense that typically can t be deferred and could impair or destroy the value of equity in the event of a default as a result a high d e ratio is often associated with high investment risk it means that a company relies primarily on debt financing 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 however if the additional cost of debt financing outweighs the additional income that it generates then the share price may drop the cost of debt and a company s ability to service it can vary with market conditions as a result borrowing that seemed prudent at first can prove unprofitable later under different circumstances changes in long term debt and assets tend to affect the d e ratio the most because the numbers involved tend to be larger than for short term debt and short term assets if investors want to evaluate a company s short term leverage and its ability to meet debt obligations that must be paid over a year or less they can use other ratios for example the cash ratio evaluates a company s near term liquidity cash ratio cash marketable securitiesshort term liabilities begin aligned text cash ratio frac text cash text marketable securities text short term liabilities end aligned cash ratio short term liabilities cash marketable securities so does the current ratio current ratio short term assetsshort term liabilities begin aligned text current ratio frac text short term assets text short term liabilities end aligned current ratio short term liabilities short term assets example of the d e ratiolet s consider an example from apple inc aapl we can see below that for q1 2024 ending dec 30 2023 apple had total liabilities of 279 billion and total shareholders equity of 74 billion 2using the above formula the d e ratio for apple can be calculated as debt to equity 279 billion 74 billion 3 77the result means that apple had 3 77 of debt for every dollar of equity but on its own the ratio doesn t give investors the complete picture it s important to compare the ratio with that of other similar companies modifying the d e rationot all debt is equally risky the long term d e ratio focuses on riskier long term debt by using its value instead of that of total liabilities in the numerator of the standard formula long term d e ratio long term debt shareholder equityshort term debt also increases a company s leverage of course but because these liabilities must be paid in a year or less they aren t as risky for example imagine a company with 1 million in short term payables wages accounts payable notes etc and 500 000 in long term debt compared with a company with 500 000 in short term payables and 1 million in long term debt if both companies have 1 5 million in shareholder equity then they both have a d e ratio of 1 on the surface the risk from leverage is identical but in reality the second company is riskier as a rule short term debt tends to be cheaper than long term debt and is less sensitive to shifts in interest rates meaning that the second company s interest expense and cost of capital are likely higher if interest rates are higher when the long term debt comes due and needs to be refinanced then interest expense will rise finally if we assume that the company will not default over the next year then debt due sooner shouldn t be a concern in contrast a company s ability to service long term debt will depend on its long term business prospects which are less certain the d e ratio for personal financesthe d e ratio can apply to personal financial statements as well serving as a personal d e ratio here equity refers to the difference between the total value of an individual s assets and their aggregate debt or liabilities the formula for the personal d e ratio is slightly different debt equity total personal liabilitiespersonal assets liabilities begin aligned text debt equity frac text total personal liabilities text personal assets text liabilities end aligned debt equity personal assets liabilitiestotal personal liabilities the personal d e ratio is often used when an individual or a small business is applying for a loan lenders use the d e figure to assess a loan applicant s ability to continue making loan payments in the event of a temporary loss of income for example a prospective mortgage borrower is more likely to be able to continue making payments during a period of extended unemployment if they have more assets than debt this is also true for an individual applying for a small business loan or a line of credit if the business owner has a good personal d e ratio it is more likely that they can continue making loan payments until their debt financed investment starts paying off d e ratio vs gearing ratiogearing ratios constitute a broad category of financial ratios of which the d e ratio is the best known gearing is a term for financial leverage gearing ratios focus more heavily on the concept of leverage than other ratios used in accounting or investment analysis the underlying principle generally assumes that some leverage is good but that too much places an organization at risk the debt to equity ratio is most useful when used to compare direct competitors if a company s d e ratio significantly exceeds those of others in its industry then its stock could be more risky limitations of the d e ratio