Debt-to-Equity ratio: Assessing financial risk in stocks
Every investor faces a critical question when evaluating stocks: how much financial risk is hiding beneath the surface? The debt-to-equity ratio answers this question by revealing exactly how a company balances borrowed money against shareholder investment. A D/E ratio of 2.0 or higher generally signals elevated risk for most industries, though utilities and financials routinely operate well above this threshold safely.
Understanding the DE ratios is especially important in today's market. With the Federal Reserve's 525 basis point rate increase since 2022, companies carrying heavy debt loads face substantially higher interest costs. The S&P 500 average D/E ratio sits at 0.61 as of Q4 2024, providing a useful benchmark for publicly traded companies.
The debt-to-equity ratio calculation explained.
The debt-to-equity ratio calculation divides a company's total debt by its shareholders' equity:
D/E Ratio = Total Debt ÷ Total Shareholders' Equity
Consider a practical example. A company with $200 million in total debt and $100 million in shareholders' equity shows a D/E ratio of 2.0. This means the company uses $2 of debt financing for every $1 of equity. A company with $50 million in debt and $120 million in equity would have a D/E of 0.42, indicating conservative financing with 42 cents of debt per dollar of equity.
Total debt encompasses all interest-bearing obligations found on the balance sheet: drawn lines of credit, notes payable (both short and long-term), bonds payable, long-term bank loans, capital lease obligations, and mortgages. Critically, accounts payable, accrued expenses, and deferred revenue should not be included, as they are operating liabilities rather than financial debt.
Shareholders' equity appears at the bottom of the balance sheet and includes common stock, preferred stock, additional paid-in capital, retained earnings, and treasury stock (which reduces equity). The calculation can also be expressed as Total Assets minus Total Liabilities.
Mastering these balance sheet calculations is fundamental to stock analysis. Our comprehensive guide on fundamental analysis tools for Indian investors explains how to apply these metrics systematically when evaluating US stocks.
Several variations serve different analytical purposes. The net debt-to-equity ratio subtracts cash and equivalents from total debt before dividing by equity, which proves useful for companies like Apple and Microsoft that hold massive cash reserves. The long-term debt-to-equity ratio excludes short-term obligations, focusing on structural leverage rather than working capital fluctuations.
Interpreting D/E ratio values correctly
A D/E ratio below 0.5 suggests very conservative financing with low financial risk. Between 0.5 and 1.0 indicates a balanced structure with more equity than debt. A ratio of 1.0 means equal parts debt and equity, with creditors and shareholders contributing equally to financing. The 1.0 to 2.0 range remains acceptable for most industries, while ratios above 2.5 warrant scrutiny, as they indicate heavy reliance on borrowed funds.
Low D/E ratios signal financial stability, lower interest burden, and greater strategic flexibility. However, extremely low leverage may indicate missed growth opportunities or inefficient capital usage. Equity financing costs more than debt due to the absence of tax shields. As one BDC analyst notes, a very low debt-to-equity ratio can indicate overly prudent management that fails to seize growth opportunities.
High D/E ratios can indicate leveraged growth strategies that amplify returns when conditions are favourable. The tax deductibility of interest payments creates a shield that enhances after-tax returns. Yet high leverage also creates vulnerability during downturns, increases bankruptcy risk, and often results in elevated borrowing costs.
Negative D/E ratios occur when shareholders' equity turns negative, meaning total liabilities exceed total assets. This typically signals severe financial distress, driven by accumulated losses, excessive dividends, major asset write-downs, or aggressive share buybacks. Boeing, for instance, has operated with negative equity ranging from -$3.9 billion to -$23.5 billion in recent years due to ongoing operational challenges.
Optimal debt levels vary by industry.
The optimal debt-to-equity ratio doesn't exist as a universal number, as it depends on industry characteristics, business model, and economic conditions. The Modigliani-Miller theorem from 1958 established the theoretical foundation: in perfect markets without taxes or bankruptcy costs, capital structure shouldn't matter. But taxes do exist, and interest payments are tax-deductible, creating a tax shield that makes debt valuable.
The trade-off theory of capital structure explains how companies balance this tax benefit against the costs of financial distress. Direct bankruptcy costs (legal fees, administrative expenses) typically run 2-4% of firm value, but indirect costs, including lost customers, supplier demands for cash, and employee departures, can be far more damaging. The optimal capital structure sits where the marginal tax benefit equals the marginal expected cost of financial distress.
Is 0.5 a good debt-to-equity ratio? Generally, yes,s since it indicates a low-debt company funded primarily by equity, with strong financial stability. But context matters. For a capital-intensive utility, where the industry average exceeds 1.5, a 0.5 ratio may indicate excessive conservatism. For a technology company, 0.5 might actually be aggressive relative to peers averaging 0.2-0.4.
What constitutes too much debt? A D/E ratio exceeding 2.0 typically raises red flags across most industries, though large public companies with diversified revenue streams can sustain higher ratios. When D/E exceeds 4.0, a company is largely financed by lenders, which is generally considered risky and requires exceptional circumstances to justify.
Industry benchmarks reveal why context matters.
Data from 2025 from NYU Stern and other authoritative sources show dramatic variation across sectors.
Technology maintains the lowest leverage in the market. Semiconductors average just 0.039 D/E, software companies around 0.05, and even higher-leverage subsectors like IT consulting reach only 0.63. The asset-light nature of tech, where value comes from intellectual property rather than physical assets, combined with high profit margins, allows equity-funded growth.
Utilities operate at the opposite extreme, with electric utilities averaging 1.58 D/E and renewable electricity reaching 2.67. This capital-intensive infrastructure requires massive upfront investments in power plants, transmission lines, and distribution networks. Regulated, predictable cash flows from rate-setting make high leverage both necessary and sustainable.
Banking and financial services present unique challenges for D/E analysis. Regional banks average 0.59, while money centre banks reach 1.83, and financial services companies hit 2.87. However, traditional D/E interpretation doesn't apply to banks, as debt is integral to their business model. Customer deposits are technically liabilities, but don't carry the same risk as borrowed money. For banks, use the Tier 1 Capital Ratio or the Loan-to-Deposit Ratio instead.
Healthcare ranges from a conservative 0.13 for healthcare products to 3.60 for healthcare facilities. Biotech and pharmaceutical companies maintain low leverage due to R&D intensity and unpredictable cash flows, while hospitals carry substantial debt for buildings and equipment.
Airlines represent one of the most leveraged sectors, with passenger airlines averaging 2.18 D/E. According to IATA, average airline D/E increased from 1.6 pre-COVID to 3.6 post-COVID due to pandemic-related borrowing.
High D/E risk analysis: lessons from corporate failures
High debt-to-equity ratios create cascading risks that can destroy even iconic companies. Interest rate sensitivity becomes critical when refinancing looms, with over 30% of USD bonds maturing in 2024 & 2025 facing rates 4+ percentage points higher than when issued in late 2021. Speculative-grade default rates reached 5.1% at year-end 2024, a post-COVID high.
Toys "R" Us exemplifies how leverage can strangle a business. The 2005 leveraged buyout by KKR, Bain Capital, and Vornado saddled the retailer with over $5 billion in debt, requiring $450-500 million annually just for interest payments. By 2017, the company had $7.9 billion in debt and $6.6 billion in assets. The debt burden prevented investment in e-commerce and store modernisation, leaving Toys "R" Us unable to compete with Amazon.
Hertz operated with a debt-to-capital ratio consistently above 90% before its May 2020 bankruptcy. Total debt reached approximately $19 billion with a net debt-to-equity ratio exceeding 10x. When COVID-19 eliminated the airport rental business virtually overnight, there was no cushion to survive the revenue shock.
WeWork demonstrates how negative equity trajectories end. At its peak, with a $47 billion valuation in 2019, warning signs were already visible. By November 2023, the company reported $18.65 billion in debt and $15.06 billion in assets, with shareholders' equity in the red.
Debt capacity assessment using solvency ratios
The interest coverage ratio (ICR) measures how many times earnings can cover interest payments: EBIT ÷ Interest Expense. An ICR above 5.0x indicates excellent coverage. Between 3.0-5.0x suggests comfortable margins. The 2.0-3.0x range is adequate but worth monitoring. Below 1.5x signals high risk, and below 1.0x means the company cannot cover interest payments from operations.
The debt service coverage ratio (DSCR) takes financial leverage analysis further by including principal repayments: Net Operating Income ÷ Total Debt Service. A DSCR above 1.5x indicates a healthy cash flow cushion. The 1.25x level represents the typical minimum for commercial lenders. A below-1.0x signal indicates an inability to fully service obligations.
Debt-to-EBITDA is another crucial solvency ratio. A below 2.0x suggests conservative leverage. The 2.0-3.0x range is moderate. Between 3.0-4.0x is elevated. The 4.0-5.0x range is high. Above 5.0x represents very high leverage with significant risk.
Factors that increase debt capacity include stable, predictable cash flows (subscription businesses, regulated utilities); tangible assets as collateral; company size and market position; high profit margins; and a conservative management track record. Factors that reduce debt capacity include cyclical or volatile revenue, an intangible-heavy asset base, small company size, high capital expenditure requirements, and aggressive financial policies.
Leverage and returns: how debt amplifies outcomes
Financial leverage acts as a multiplier on equity returns through a mechanism visible in the DuPont formula:
ROE = Net Profit Margin × Asset Turnover × Equity Multiplier
The equity multiplier (Total Assets ÷ Shareholders' Equity) directly connects to the D/E ratio: Equity Multiplier = 1 + D/E Ratio. A company with 10.1% ROA and an equity multiplier of 1.9 generates 19.19% ROE, nearly double the return on assets, because leverage magnifies the earnings available per dollar of equity.
The extended relationship shows: ROE = ROA + (ROA - Cost of Debt) × D/E Ratio. This reveals the critical breakeven point. Leverage only benefits shareholders when return on assets exceeds the cost of borrowing. If a company earns 10% on assets while paying 6% on debt, a 4% spread, when leveraged, enhances equity returns. But if ROA drops to 5% while borrowing costs remain at 7%, leverage destroys value by amplifying the negative spread.
Consider property investment. A $1 million property purchased with 20% equity ($200,000) and 80% debt ($800,000) that appreciates 10% generates a $100,000 gain, representing a 50% return on equity. An all-cash purchase would yield only 10%. But if the property declines 10%, that same leverage transforms a $100,000 loss into a 50% equity wipeout.
Real company D/E ratios reveal strategic approaches.
Among the Magnificent Seven tech giants, Alphabet maintains the cleanest balance sheet with a D/E ratio of just 0.06 and interest coverage of 448x. NVIDIA's D/E has collapsed from 0.50 to 0.07 as explosive AI-driven earnings caused equity to surge from $22 billion to $79 billion while debt held stable. Microsoft's D/E declined from 0.62 (2020) to 0.26 (2025) even while completing the Activision acquisition.
Apple stands out among tech peers with a D/E ratio of 1.34, higher than the sector average but supported by $100+ billion in annual free cash flow. The company uses debt strategically to fund share buybacks while preserving offshore cash flexibility. Amazon's D/E improved dramatically, from a peak of 1.37 to 0.18-0.37, as AWS's profitability drove equity growth.
Tesla exemplifies successful deleveraging, with D/E dropping from 0.60 (2020) to 0.10-0.17 as the company achieved sustained profitability. Stockholders' equity tripled from $22 billion to $73 billion while total debt fell from $11.7 billion to around $8 billion.
Utility companies demonstrate acceptable high leverage. Duke Energy operates at 1.57-1.70 D/E, Southern Company at 1.66-2.11, and NextEra Energy at 1.36. These ratios would signal danger in other industries, but are sustainable given regulated revenue streams.
Warren Buffett's Berkshire Hathaway maintains a D/E of 0.18 with stockholders' equity of $698 billion, consistent with Buffett's stated preference for D/E under 0.5.
Red flags and practical investor guidance
Quantitative warning signs include D/E ratios above 2.0 for most industries, net debt-to-EBITDA above 4-5x, interest coverage below 2x, rapid D/E increases over time, and high concentration of short-term debt. Negative shareholders' equity is a severe red flag that almost always warrants avoidance.
Qualitative concerns include share repurchases funded by debt, which inflate D/E without apparent new borrowing; frequent covenant waivers from lenders; rising refinancing costs; debt-financed acquisitions without commensurate earnings growth; and variable-rate debt exposure in rising-rate environments.
When high D/E might be acceptable: utilities with stable regulated cash flows, mature companies with predictable revenues, asset-backed debt secured by liquid collateral, or high-growth phases where debt funds value-creating investments. When low D/E may be concerning: under-leveraging that misses growth opportunities competitors are seizing, capital-allocation inefficiencies, or an inability to access credit that peers can obtain.
The most common investor mistakes include comparing D/E ratios across incompatible industries, ignoring debt quality (fixed vs. variable, secured vs. unsecured), relying on book value when market values differ substantially, analysing single snapshots rather than trends, and neglecting cash position when net debt ratios would be more meaningful.
The debt-to-equity ratio provides essential insight into financial risk, but only when properly contextualised. Industry benchmarking matters more than absolute thresholds since a 1.5 D/E signals danger for a software company but normalcy for a utility. Combining D/E with interest coverage ratios, debt-to-EBITDA, and free cash flow analysis creates a comprehensive picture that no single metric can provide.
Understanding how these ratios work together strengthens your analytical framework. Our breakdown of essential financial ratios for Indian investors provides the complete toolkit for evaluating US stocks effectively.
As Warren Buffett advises, borrowed money has no place in an investor's toolkit because anything can happen at any time in markets. The companies that emerge strongest from the next downturn will be those that maintained financial flexibility while competitors overreached.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
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Table of Contents
Every investor faces a critical question when evaluating stocks: how much financial risk is hiding beneath the surface? The debt-to-equity ratio answers this question by revealing exactly how a company balances borrowed money against shareholder investment. A D/E ratio of 2.0 or higher generally signals elevated risk for most industries, though utilities and financials routinely operate well above this threshold safely.
Understanding the DE ratios is especially important in today's market. With the Federal Reserve's 525 basis point rate increase since 2022, companies carrying heavy debt loads face substantially higher interest costs. The S&P 500 average D/E ratio sits at 0.61 as of Q4 2024, providing a useful benchmark for publicly traded companies.
The debt-to-equity ratio calculation explained.
The debt-to-equity ratio calculation divides a company's total debt by its shareholders' equity:
D/E Ratio = Total Debt ÷ Total Shareholders' Equity
Consider a practical example. A company with $200 million in total debt and $100 million in shareholders' equity shows a D/E ratio of 2.0. This means the company uses $2 of debt financing for every $1 of equity. A company with $50 million in debt and $120 million in equity would have a D/E of 0.42, indicating conservative financing with 42 cents of debt per dollar of equity.
Total debt encompasses all interest-bearing obligations found on the balance sheet: drawn lines of credit, notes payable (both short and long-term), bonds payable, long-term bank loans, capital lease obligations, and mortgages. Critically, accounts payable, accrued expenses, and deferred revenue should not be included, as they are operating liabilities rather than financial debt.
Shareholders' equity appears at the bottom of the balance sheet and includes common stock, preferred stock, additional paid-in capital, retained earnings, and treasury stock (which reduces equity). The calculation can also be expressed as Total Assets minus Total Liabilities.
Mastering these balance sheet calculations is fundamental to stock analysis. Our comprehensive guide on fundamental analysis tools for Indian investors explains how to apply these metrics systematically when evaluating US stocks.
Several variations serve different analytical purposes. The net debt-to-equity ratio subtracts cash and equivalents from total debt before dividing by equity, which proves useful for companies like Apple and Microsoft that hold massive cash reserves. The long-term debt-to-equity ratio excludes short-term obligations, focusing on structural leverage rather than working capital fluctuations.
Interpreting D/E ratio values correctly
A D/E ratio below 0.5 suggests very conservative financing with low financial risk. Between 0.5 and 1.0 indicates a balanced structure with more equity than debt. A ratio of 1.0 means equal parts debt and equity, with creditors and shareholders contributing equally to financing. The 1.0 to 2.0 range remains acceptable for most industries, while ratios above 2.5 warrant scrutiny, as they indicate heavy reliance on borrowed funds.
Low D/E ratios signal financial stability, lower interest burden, and greater strategic flexibility. However, extremely low leverage may indicate missed growth opportunities or inefficient capital usage. Equity financing costs more than debt due to the absence of tax shields. As one BDC analyst notes, a very low debt-to-equity ratio can indicate overly prudent management that fails to seize growth opportunities.
High D/E ratios can indicate leveraged growth strategies that amplify returns when conditions are favourable. The tax deductibility of interest payments creates a shield that enhances after-tax returns. Yet high leverage also creates vulnerability during downturns, increases bankruptcy risk, and often results in elevated borrowing costs.
Negative D/E ratios occur when shareholders' equity turns negative, meaning total liabilities exceed total assets. This typically signals severe financial distress, driven by accumulated losses, excessive dividends, major asset write-downs, or aggressive share buybacks. Boeing, for instance, has operated with negative equity ranging from -$3.9 billion to -$23.5 billion in recent years due to ongoing operational challenges.
Optimal debt levels vary by industry.
The optimal debt-to-equity ratio doesn't exist as a universal number, as it depends on industry characteristics, business model, and economic conditions. The Modigliani-Miller theorem from 1958 established the theoretical foundation: in perfect markets without taxes or bankruptcy costs, capital structure shouldn't matter. But taxes do exist, and interest payments are tax-deductible, creating a tax shield that makes debt valuable.
The trade-off theory of capital structure explains how companies balance this tax benefit against the costs of financial distress. Direct bankruptcy costs (legal fees, administrative expenses) typically run 2-4% of firm value, but indirect costs, including lost customers, supplier demands for cash, and employee departures, can be far more damaging. The optimal capital structure sits where the marginal tax benefit equals the marginal expected cost of financial distress.
Is 0.5 a good debt-to-equity ratio? Generally, yes,s since it indicates a low-debt company funded primarily by equity, with strong financial stability. But context matters. For a capital-intensive utility, where the industry average exceeds 1.5, a 0.5 ratio may indicate excessive conservatism. For a technology company, 0.5 might actually be aggressive relative to peers averaging 0.2-0.4.
What constitutes too much debt? A D/E ratio exceeding 2.0 typically raises red flags across most industries, though large public companies with diversified revenue streams can sustain higher ratios. When D/E exceeds 4.0, a company is largely financed by lenders, which is generally considered risky and requires exceptional circumstances to justify.
Industry benchmarks reveal why context matters.
Data from 2025 from NYU Stern and other authoritative sources show dramatic variation across sectors.
Technology maintains the lowest leverage in the market. Semiconductors average just 0.039 D/E, software companies around 0.05, and even higher-leverage subsectors like IT consulting reach only 0.63. The asset-light nature of tech, where value comes from intellectual property rather than physical assets, combined with high profit margins, allows equity-funded growth.
Utilities operate at the opposite extreme, with electric utilities averaging 1.58 D/E and renewable electricity reaching 2.67. This capital-intensive infrastructure requires massive upfront investments in power plants, transmission lines, and distribution networks. Regulated, predictable cash flows from rate-setting make high leverage both necessary and sustainable.
Banking and financial services present unique challenges for D/E analysis. Regional banks average 0.59, while money centre banks reach 1.83, and financial services companies hit 2.87. However, traditional D/E interpretation doesn't apply to banks, as debt is integral to their business model. Customer deposits are technically liabilities, but don't carry the same risk as borrowed money. For banks, use the Tier 1 Capital Ratio or the Loan-to-Deposit Ratio instead.
Healthcare ranges from a conservative 0.13 for healthcare products to 3.60 for healthcare facilities. Biotech and pharmaceutical companies maintain low leverage due to R&D intensity and unpredictable cash flows, while hospitals carry substantial debt for buildings and equipment.
Airlines represent one of the most leveraged sectors, with passenger airlines averaging 2.18 D/E. According to IATA, average airline D/E increased from 1.6 pre-COVID to 3.6 post-COVID due to pandemic-related borrowing.
High D/E risk analysis: lessons from corporate failures
High debt-to-equity ratios create cascading risks that can destroy even iconic companies. Interest rate sensitivity becomes critical when refinancing looms, with over 30% of USD bonds maturing in 2024 & 2025 facing rates 4+ percentage points higher than when issued in late 2021. Speculative-grade default rates reached 5.1% at year-end 2024, a post-COVID high.
Toys "R" Us exemplifies how leverage can strangle a business. The 2005 leveraged buyout by KKR, Bain Capital, and Vornado saddled the retailer with over $5 billion in debt, requiring $450-500 million annually just for interest payments. By 2017, the company had $7.9 billion in debt and $6.6 billion in assets. The debt burden prevented investment in e-commerce and store modernisation, leaving Toys "R" Us unable to compete with Amazon.
Hertz operated with a debt-to-capital ratio consistently above 90% before its May 2020 bankruptcy. Total debt reached approximately $19 billion with a net debt-to-equity ratio exceeding 10x. When COVID-19 eliminated the airport rental business virtually overnight, there was no cushion to survive the revenue shock.
WeWork demonstrates how negative equity trajectories end. At its peak, with a $47 billion valuation in 2019, warning signs were already visible. By November 2023, the company reported $18.65 billion in debt and $15.06 billion in assets, with shareholders' equity in the red.
Debt capacity assessment using solvency ratios
The interest coverage ratio (ICR) measures how many times earnings can cover interest payments: EBIT ÷ Interest Expense. An ICR above 5.0x indicates excellent coverage. Between 3.0-5.0x suggests comfortable margins. The 2.0-3.0x range is adequate but worth monitoring. Below 1.5x signals high risk, and below 1.0x means the company cannot cover interest payments from operations.
The debt service coverage ratio (DSCR) takes financial leverage analysis further by including principal repayments: Net Operating Income ÷ Total Debt Service. A DSCR above 1.5x indicates a healthy cash flow cushion. The 1.25x level represents the typical minimum for commercial lenders. A below-1.0x signal indicates an inability to fully service obligations.
Debt-to-EBITDA is another crucial solvency ratio. A below 2.0x suggests conservative leverage. The 2.0-3.0x range is moderate. Between 3.0-4.0x is elevated. The 4.0-5.0x range is high. Above 5.0x represents very high leverage with significant risk.
Factors that increase debt capacity include stable, predictable cash flows (subscription businesses, regulated utilities); tangible assets as collateral; company size and market position; high profit margins; and a conservative management track record. Factors that reduce debt capacity include cyclical or volatile revenue, an intangible-heavy asset base, small company size, high capital expenditure requirements, and aggressive financial policies.
Leverage and returns: how debt amplifies outcomes
Financial leverage acts as a multiplier on equity returns through a mechanism visible in the DuPont formula:
ROE = Net Profit Margin × Asset Turnover × Equity Multiplier
The equity multiplier (Total Assets ÷ Shareholders' Equity) directly connects to the D/E ratio: Equity Multiplier = 1 + D/E Ratio. A company with 10.1% ROA and an equity multiplier of 1.9 generates 19.19% ROE, nearly double the return on assets, because leverage magnifies the earnings available per dollar of equity.
The extended relationship shows: ROE = ROA + (ROA - Cost of Debt) × D/E Ratio. This reveals the critical breakeven point. Leverage only benefits shareholders when return on assets exceeds the cost of borrowing. If a company earns 10% on assets while paying 6% on debt, a 4% spread, when leveraged, enhances equity returns. But if ROA drops to 5% while borrowing costs remain at 7%, leverage destroys value by amplifying the negative spread.
Consider property investment. A $1 million property purchased with 20% equity ($200,000) and 80% debt ($800,000) that appreciates 10% generates a $100,000 gain, representing a 50% return on equity. An all-cash purchase would yield only 10%. But if the property declines 10%, that same leverage transforms a $100,000 loss into a 50% equity wipeout.
Real company D/E ratios reveal strategic approaches.
Among the Magnificent Seven tech giants, Alphabet maintains the cleanest balance sheet with a D/E ratio of just 0.06 and interest coverage of 448x. NVIDIA's D/E has collapsed from 0.50 to 0.07 as explosive AI-driven earnings caused equity to surge from $22 billion to $79 billion while debt held stable. Microsoft's D/E declined from 0.62 (2020) to 0.26 (2025) even while completing the Activision acquisition.
Apple stands out among tech peers with a D/E ratio of 1.34, higher than the sector average but supported by $100+ billion in annual free cash flow. The company uses debt strategically to fund share buybacks while preserving offshore cash flexibility. Amazon's D/E improved dramatically, from a peak of 1.37 to 0.18-0.37, as AWS's profitability drove equity growth.
Tesla exemplifies successful deleveraging, with D/E dropping from 0.60 (2020) to 0.10-0.17 as the company achieved sustained profitability. Stockholders' equity tripled from $22 billion to $73 billion while total debt fell from $11.7 billion to around $8 billion.
Utility companies demonstrate acceptable high leverage. Duke Energy operates at 1.57-1.70 D/E, Southern Company at 1.66-2.11, and NextEra Energy at 1.36. These ratios would signal danger in other industries, but are sustainable given regulated revenue streams.
Warren Buffett's Berkshire Hathaway maintains a D/E of 0.18 with stockholders' equity of $698 billion, consistent with Buffett's stated preference for D/E under 0.5.
Red flags and practical investor guidance
Quantitative warning signs include D/E ratios above 2.0 for most industries, net debt-to-EBITDA above 4-5x, interest coverage below 2x, rapid D/E increases over time, and high concentration of short-term debt. Negative shareholders' equity is a severe red flag that almost always warrants avoidance.
Qualitative concerns include share repurchases funded by debt, which inflate D/E without apparent new borrowing; frequent covenant waivers from lenders; rising refinancing costs; debt-financed acquisitions without commensurate earnings growth; and variable-rate debt exposure in rising-rate environments.
When high D/E might be acceptable: utilities with stable regulated cash flows, mature companies with predictable revenues, asset-backed debt secured by liquid collateral, or high-growth phases where debt funds value-creating investments. When low D/E may be concerning: under-leveraging that misses growth opportunities competitors are seizing, capital-allocation inefficiencies, or an inability to access credit that peers can obtain.
The most common investor mistakes include comparing D/E ratios across incompatible industries, ignoring debt quality (fixed vs. variable, secured vs. unsecured), relying on book value when market values differ substantially, analysing single snapshots rather than trends, and neglecting cash position when net debt ratios would be more meaningful.
The debt-to-equity ratio provides essential insight into financial risk, but only when properly contextualised. Industry benchmarking matters more than absolute thresholds since a 1.5 D/E signals danger for a software company but normalcy for a utility. Combining D/E with interest coverage ratios, debt-to-EBITDA, and free cash flow analysis creates a comprehensive picture that no single metric can provide.
Understanding how these ratios work together strengthens your analytical framework. Our breakdown of essential financial ratios for Indian investors provides the complete toolkit for evaluating US stocks effectively.
As Warren Buffett advises, borrowed money has no place in an investor's toolkit because anything can happen at any time in markets. The companies that emerge strongest from the next downturn will be those that maintained financial flexibility while competitors overreached.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
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