Why is it important for a business to maintain a debt to equity ratio below 100%?

A debt to equity ratio below 100% is significant as it reflects a balanced approach to financing, where the business is less reliant on borrowed funds compared to its own equity. When a company's debt to equity ratio is below 100%, it suggests that the assets of the business are primarily financed by owners' equity rather than debt. This internal funding reliance can lower the risk of bankruptcy because the company is not over-leveraged and has a greater buffer to absorb financial downturns.

In addition, a lower ratio may attract potential investors, as it indicates a more stable financial structure. This can enhance the company's ability to secure financing on favorable terms in the future if needed. The presence of lesser debt also implies lower interest obligations, making it easier for the business to manage cash flows and invest in growth opportunities without the strain of heavy debt repayments.