One of the most widely used and publicised investing formula’s, especially, in conjunction with P/E, the debt-to-equity [D/E] ratio is used by professional market players and individual investors regularly.

The D/E ratio is a determinant of the leverage that compares a company’s total liabilities to its total shareholders’ equity.

D/E calculates how much the company ower to suppliers, lenders, and other creditors compared to the amount shareholders have committed. Lower D/E ratios mean that a company is using less leverage than other companies and has a stronger equity position. During the GFC, many companies with higher D/E ratios, and short term debt that needed to be rolled over quickly found themselves unable to meet their obligations.

D/E is not a completely transparent measurement of a company’s debt as it includes operational liabilities within the total company liabilities. Despite this, the calculation allows individuals to quickly gauge a reasonable indication of a company’s equity to liability relationship.

There may be many reasons why a company has a lower D/E ratio, and the reasons can be both good and bad for investors, and the company. The company may have a low D/E because it can’t afford to service any more debt. Or, from a more positive perspective, the company may be poised for growth, through debt funded borrowing, which may raise the D/E but allow expansion and new equity and capital injections from shareholders.