What does the debt to equity ratio measure?

The debt to equity ratio is a financial metric that assesses the relative proportion of a business's debt and equity used to finance its operations. It specifically measures the amount of debt a company is using in relation to its equity. This ratio is crucial for understanding the financial leverage of a company; a higher debt to equity ratio suggests that a company is relying more on borrowed funds to finance its activities compared to its own equity.

By focusing on the proportion of internal (equity) versus external (debt) funding, this ratio provides insights into the financial structure of the company and how risky it may be. If a company has a high proportion of debt compared to equity, it may indicate greater financial risk, especially during economic downturns when cash flow could be impacted.

Understanding this balance helps investors and creditors evaluate the company's risk profile and overall financial health.