What Is a Debt-To-Equity Ratio and How Can Investors Use It?

A debt-to-equity ratio is a way to measure how solid a company's financial position is. Here, we take a closer look at what it is and how investors can use it.

a large red sphere and a small yellow one balancing on piece of wood
(Image credit: Getty Images)

In nutrition science,  there's a theory of metabolic typing that determines what type of macronutrient – protein, fat, carbs or a mix – you run best on. The debt-to-equity ratio is the metabolic typing equivalent for businesses. It can tell you what type of funding – debt or equity – a business primarily runs on.

"Observing a company's capital structure is very important as the cost of capital has increased significantly in the aftermath of the Federal Reserve's steep rate hikes," says Stash Graham, managing director at Graham Capital Wealth Management. "As debt becomes more expensive to service, companies with larger than average debt burdens must allocate more cash towards paying down debt instead of returning that cash to shareholders through cash dividends or share repurchases."

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

To continue reading this article
please register for free

This is different from signing in to your print subscription

Why am I seeing this? Find out more here

Coryanne Hicks
Contributing Writer, Kiplinger.com

Coryanne Hicks is an investing and personal finance journalist specializing in women and millennial investors. Previously, she was a fully licensed financial professional at Fidelity Investments where she helped clients make more informed financial decisions every day. She has ghostwritten financial guidebooks for industry professionals and even a personal memoir. She is passionate about improving financial literacy and believes a little education can go a long way. You can connect with her on Twitter, Instagram or her website, CoryanneHicks.com.