Debt To Equity

Asset symbol is not found or was delisted

D/E

=

Total Debt Total Equity

Taking is a step further, some of the reasons you may not want to invest in a company that has a high debt to equity number is if the markets begin to slow and sales are affected, they may not be able to pay back their loans, leading to a possible bankruptcy. Secondly, if the number is high, they may be depending on lending to keep cash flow healthy, which is not a sustainable growth model.

On the other side, if the number is low, this means they are not leveraged and are either doing well enough to not need debt or lenders may not lend to them. You will have to research this because the answer would dictate where you go from there. A little debt is alright, but you do not want the company to be over leveraged.

Another way to use this ratio is to compare it to others within the same industry, that way you can see the average of the whole industry. If it is too leveraged, you may look elsewhere within the industry to give you less risk and more value for your dollar.

This is typically one of the most widely used ratios and should be at the front of your fundamental research tool kit. Be sure to look under the hood and find what is driving the result of your equation because there may be more than just the number. Remember that this takes in data and no human emotion, so if you get a feel the company is going one direction, take that into account to help give you a well rounded opinion before jumping into an investment.