Debt to equity ratio
The debt to equity ratio of a company is simply its level of debt (any type of borrowed money) divided by equity (the shareholders' money in the business).
The debt to equity ratio of a company is simply its level of debt (any type of borrowed money - from bank loans to bonds issued by the company) divided by equity (the shareholders' money in the business). Expressed as a percentage, this gives the companies 'gearing'.A company with a high level of debt will have a high debt-to-equity ratio, and hence be 'highly geared'.
A high level of gearing helps companies to produce better returns for shareholders when times are good, but in bad times, the highly geared are saddled with having to pay interest on their debt. Those which have chosen a high level of equity finance instead of debt, on the other hand, are not obliged to pay out - dividends are discretionary - and can often weather bad times better.
The appropriate mix of debt and equity depends on the type of business - those with stable long-term incomes (tobacco companies, for example) can better cope with being highly geared.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
See Tim Bennett's video tutorial: Three ways leverage can boost your returns.
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
-
New Chase bonus deal takes savings rate to 4.75% – is it worth it?
Chase’s latest savings deal propels it into second place in the best-buy tables, but there are some pitfalls to look out for
By Katie Williams Published
-
Review: Trasierra – a yoga retreat in the Spanish hills
Flora Connell joins a yoga retreat at Trasierra, in the Sierra Morena mountains north of Seville
By Flora Connell Published