To calculate the debt-to-equity ratio, divide a company’s total liabilities by its total shareholders’ equity. Both numbers sit on the balance sheet, and the result tells you how much borrowed money the business uses for every dollar its owners have invested. A ratio of 1.0 means equal parts debt and equity. Above 1.0 means the company leans more on debt; below 1.0 means equity carries the heavier load.
The Formula and a Worked Example
Debt-to-Equity Ratio = Total Liabilities รท Total Shareholders’ Equity
Say a balance sheet reports $750,000 in total liabilities and $500,000 in total shareholders’ equity. Divide $750,000 by $500,000 and you get 1.5. The company uses $1.50 of debt for every $1.00 of equity. Some analysts write this as 150%; it’s the same information.
Compare that to a company with $200,000 in total liabilities and $600,000 in shareholders’ equity. The ratio is 0.33. This business funds itself primarily through owner investment and retained profits. The contrast between 1.5 and 0.33 tells you which company carries more financial risk from leverage before you look at anything else.
The Two Inputs
Total liabilities is everything the company owes to anyone who isn’t an owner. It bundles short-term obligations due within a year (accounts payable, upcoming loan payments, accrued wages) with long-term obligations stretching further out (bonds, mortgages, multi-year loans). Most balance sheets show a single line labeled “Total Liabilities” that combines both categories. That’s the number you want in the numerator.
Total shareholders’ equity is what the owners have in the business after all debts are subtracted from total assets. It includes the money investors originally put in (common stock and additional paid-in capital), plus profits the company kept instead of paying out as dividends (retained earnings), minus any shares the company bought back (treasury stock). If the company sold every asset at book value and paid off every liability, shareholders’ equity is what the owners would walk away with.
Where to Find the Numbers
For any publicly traded company, the balance sheet is in SEC filings you can read for free. Annual reports are filed on Form 10-K, quarterly updates on Form 10-Q. Both are searchable through the SEC’s EDGAR system, which provides full-text access to more than twenty years of filings.1U.S. Securities and Exchange Commission. Search Filings Pull up the balance sheet, look for “Total Liabilities,” and find “Total Stockholders’ Equity” directly below it.
Private companies don’t file with the SEC, so their statements aren’t public. If you own or manage a private business, you’ll pull the same figures from internal accounting records or the balance sheet your accountant prepares. Most accounting software generates a standard balance sheet with the same labels public filings use. Outside investors and lenders typically ask for reviewed or audited statements when they need the ratio.
Reading the Result
A higher ratio signals heavier reliance on borrowed money. That isn’t automatically bad. Debt lets companies grow faster, and interest payments are tax-deductible. But the business has more fixed obligations to meet regardless of how the year goes. When revenue drops, a highly leveraged company still faces the same loan payments, and cash flow can tighten quickly.
A lower ratio means more breathing room. Fewer debt payments to service, less exposure to rising interest rates, and more flexibility to borrow later if an opportunity appears. The tradeoff is that the company may be growing more slowly than a competitor willing to take on leverage.
Interest rates change how painful the tradeoff feels. With the Federal Reserve’s benchmark rate at roughly 3.50% to 3.75% in early 2026, companies carrying variable-rate debt or refinancing maturing bonds face meaningfully higher costs than they did a few years ago. A ratio of 2.0 read differently when rates were near zero than it does now.
Industry Benchmarks for 2026
Comparing a company’s ratio to its own industry matters more than comparing it to the market as a whole. Capital-intensive businesses that need expensive infrastructure, heavy equipment, or large inventories naturally carry more debt than asset-light ones. A utility with a ratio of 1.5 may be conservatively financed by industry standards; a software company at the same ratio would look aggressively leveraged.
Based on January 2026 data covering U.S. public companies, market-value debt-to-equity ratios for selected sectors:2NYU Stern. Debt Fundamentals by Sector (US)
- Power: 73.9% (0.74)
- General utilities: 75.9% (0.76)
- Oil and gas distribution: 58.2% (0.58)
- Hospitals and healthcare facilities: 57.8% (0.58)
- Retail (grocery and food): 50.9% (0.51)
- Machinery: 14.4% (0.14)
- Healthcare products: 12.5% (0.13)
- Software (systems and applications): 5.7% (0.06)
- Total market (excluding financials): 17.1% (0.17)
These figures use market value of equity in the denominator, meaning stock price multiplied by shares outstanding. Because stock prices usually run well above book value, market-value ratios come out lower than the book-value ratios you’d calculate straight from the balance sheet. A company showing a 0.76 market-value ratio might show 1.5 or higher on a book-value basis. Make sure you’re comparing the same version when you check your result against published benchmarks.
Common Variations
The formula above uses total liabilities, which is the broadest version. Analysts frequently adjust the numerator or denominator depending on what they want to know.
Long-Term Debt to Equity
This version strips out current liabilities and keeps only long-term debt on top. Short-term obligations like accounts payable and accrued expenses are part of normal operations. A distributor might carry large payables that get settled every 30 days as inventory sells, and including those inflates the ratio in a way that overstates permanent leverage. Isolating long-term debt gives a cleaner picture of structural borrowing.
Interest-Bearing Debt to Equity
Another cut counts only obligations that charge interest (short-term and long-term loans, bonds, lines of credit) and excludes non-interest-bearing items like trade payables, accrued wages, and deferred revenue. A company might owe suppliers $2 million due in 30 days and also owe a bank $5 million over five years; the two carry very different risk profiles. This variation focuses on the debt that actually costs money to carry.
Book Value Versus Market Value
The standard calculation uses balance-sheet figures, which reflect historical cost. Some analysts substitute market capitalization for book equity, arguing that the market’s current valuation is more relevant than accounting entries that may be decades old. The choice makes a real difference, since market-value equity is often multiples of book-value equity for profitable companies, and that pushes the ratio down. Neither approach is wrong, but stay consistent when comparing across companies or time periods.
Where the Ratio Misleads
The debt-to-equity ratio is a useful starting point with blind spots that can lead you to wrong conclusions.
Negative Shareholders’ Equity
When the denominator goes negative, the ratio stops working as a comparison tool. A company with $10 billion in liabilities and negative $2 billion in equity produces a ratio of negative 5.0, and that number tells you nothing useful relative to a company at positive 2.0.
Negative equity happens for two main reasons. The first is straightforward: accumulated losses have eroded the original investment. A startup burning through cash for years may reach this point before turning profitable. The second is more counterintuitive. Aggressive share buybacks reduce book equity by the purchase amount, and companies buying back stock at prices well above book value can wipe out equity entirely. McDonald’s, Starbucks, and Domino’s have all reported negative shareholders’ equity in recent years, driven largely by buyback programs. These are profitable businesses; the negative equity is a side effect of returning cash to shareholders, not a sign of distress.
Intangible Assets and Goodwill
Companies that grow through acquisitions often carry large amounts of goodwill on their balance sheets, which inflates total assets and, by extension, book equity. Goodwill represents the premium paid above the fair value of acquired assets. It’s an accounting entry, not something you could sell. A company with $5 billion in equity that includes $3 billion of goodwill has a much thinner cushion than the balance sheet suggests. Some analysts calculate a tangible equity version of the ratio by subtracting goodwill and other intangible assets before dividing.
Operating Leases After ASC 842
Before 2019, operating leases (office space, equipment, vehicles) didn’t appear as liabilities on the balance sheet. The accounting standard known as ASC 842 changed that, requiring companies to recognize lease obligations as liabilities with corresponding right-of-use assets. Total liabilities jumped for companies with significant lease portfolios (retailers, airlines, restaurant chains), and their debt-to-equity ratios climbed overnight without any change in actual economic risk. When comparing a company’s ratio before and after 2019, part of the jump may be accounting reclassification rather than new borrowing.
Point-in-Time Snapshot
The balance sheet captures one moment. A seasonal business might show radically different ratios in December versus June depending on when it borrows to build inventory. A company that closed a major debt offering the week before the reporting date will look far more leveraged than it did a month earlier. Looking at the ratio across several quarters gives a more reliable read than any single data point.