Debt-to-Equity ratio

Formula

Debt-to-Equity Ratio = Total liabilities / Total Shareholders’ Equity

Where:

Total liabilities = Non-current liabilities + current liabilities

Shareholders’ Equity = Share capital + Reserves (retained earnings, etc.)

 Explanation

The Debt-to-Equity ratio measures a company’s financial leverage—how much of the business is financed by debt compared to owners’ funds.

• A higher D/E indicates greater reliance on borrowing (higher financial risk).
• A lower D/E suggests more conservative financing and lower risk to creditors.

This ratio helps assess:

• Capital structure
• Long-term solvency
• Risk faced by shareholders and lenders

Satisfactory Level

There is no universal ideal level. A satisfactory D/E ratio:

• Matches the industry norm
• Is stable over time
• Is manageable given the company’s cash flows

General guideline:

• < 1.0 → conservative, low risk
• 1.0 – 2.0 → acceptable for many industries
• > 2.0 → high gearing; higher financial risk

Industry Norms (Approximate)

Industry	Typical D/E
Manufacturing	0.5 – 1.5
Retail	1.0 – 2.0
Construction	1.5 – 3.0
Utilities	1.5 – 2.5
Technology	0.2 – 0.8
Banking & Finance	Very high (special case)

⚠️ Capital-intensive industries usually tolerate higher D/E ratios.

Example

Modern More Sdn. Bhd.

• Total Debt: RM600,000
• Total Shareholders’ Equity: RM400,000

Step: Calculate Debt-to-Equity Ratio

D/E = 600,000 / 400,000 = 1.5

Interpretation:

The company uses RM1.50 of debt for every RM1 of equity.

This indicates moderate gearing—acceptable for many manufacturing firms, but it increases financial risk if profits decline.

Summary

• Measures financial risk and leverage, not profitability
• High D/E can boost ROE, but also increases risk

Always interpret together with:

• Interest coverage ratio
• Cash flow position
• Industry benchmarks