Even though you can find your company’s debt on its balance sheet, putting those numbers in perspective may help lenders and other institutions evaluate your business to get an overall picture of its financial health. That’s where the debt-to-equity ratio comes in. Find out more about the debt-to-equity ratio and why it matters for business owners and lenders alike.
What is business debt?
Business debt is any money that has been given to you to fund your operations and that you must repay. SBA loans, credit card bills, merchant cash advances, bank term loans, and similar business funding mechanisms comprise your business debt.
What is equity?
Equity is the difference between the cash value of all your assets (including patents, inventory, and commercial real estate) and the debts you owe. It represents the maximum potential value that you could divide among your shareholders if you liquidated all your assets and paid off all your liabilities.
What is the debt-to-equity ratio?
The debt-to-equity ratio (D/E) shows how much of your business is financed by borrowed money compared to the value the owners have invested. In simple terms, it measures financial leverage and risk. A higher ratio generally means the business relies more heavily on debt, which may increase financial pressure during slow periods. A lower ratio suggests the business may be funded more by owner investment and retained profits, which typically signals greater financial stability and the ability to repay debt.
For many small businesses, equity is not just shareholder capital. It often includes the owner’s initial investment, additional capital contributions, and retained earnings that have been reinvested back into the company over time. By comparing that equity to total business debt, the ratio may help lenders and owners understand how balanced the company’s financing structure is and how much risk comes from relying on borrowed funds.
How to calculate debt-to-equity
Your company’s debt-to-equity ratio is calculated by dividing total business debt by total business equity. It compares what your business owes to what it owns outright after liabilities are accounted for. This measurement is most useful when you want to understand how your company is financed, evaluate financial risk, or prepare for conversations with lenders who want to assess your leverage and repayment capacity.
There are other ways to write the formula, depending on what financial information is available. Since equity equals assets minus liabilities, the ratio can be calculated using total liabilities divided by total equity or total liabilities divided by assets minus liabilities. All versions produce the same result. Most businesses pull these numbers directly from the balance sheet, but if you are estimating your financial position, assets and liabilities are often easier to calculate more quickly than equity.
Examples of debt-to-equity
Take a look at an example that uses Amazon’s real-life balance sheet and its asset, debt, and equity data for several debt-to-equity ratio calculations.
Amazon’s December 31, 2025, balance sheet shows $406.98 billion in total liabilities and $411.07 billion in total equity. Based on this information, Amazon’s debt-to-equity ratio is:
D/E = total debts/total equity = $406.98B / 411.07B = 0.99
It’s also worth calculating Amazon’s debt-to-equity ratio for 2024, 2023, and 2022 to show how a major company’s debt-to-equity ratio may change over time. Using the data from Amazon’s historical balance sheets, you’ll calculate the following debt-to-equity values:
D/E (2024) = $338.92B / 285.97B = 1.19
D/E (2023) = $325.98B / $201.88B = 1.62
D/E (2022) = $316.63B / 146.04B = 2.17
As you can see, Amazon had a much higher debt-to-equity ratio in 2022 than in 2025, and the company’s ratio decreases over time. The meaning that investors and financiers ascribe to this ratio may help explain these changes.
Why the debt-to-equity ratio matters
Some lenders may consider calculating the debt-to-equity ratio because it reveals how focused the company has been on fueling growth by taking on debt. When compared to the value of its net worth, the amount of debt a firm takes on demonstrates how much risk is at stake. With a significant amount of debt, the business may generate revenue through more activity but may also fall behind on payments if the balance between costs and profits is tipped too far.
On the other hand, a lower D/E ratio indicates to lenders and investors that there’s an available safety cushion in case the firm starts falling behind on debt payments. Fall too low, however, and the ratio may indicate that the business is not taking full advantage of its available resources.
Ideally, the D/E should neither be too high nor too low to demonstrate that the company is growing sustainably.
Benefits of a high debt-to-equity ratio
Among the reasons a high debt-to-equity ratio could benefit your business include:
- Trustworthy borrowing: When you hear the term “debt to equity,” you might think that lower values are better since debt is often undesirable. However, a high debt-to-equity ratio may indicate to financiers that your company is seeing a high return on equity. Put another way, if your assets are fixed and your debt increases, your equity decreases, leaving your company with more cash flow to cover its debts.
- More valuable company: Often, debt costs less than equity does, so a high debt-to-equity ratio could signify that your business has relatively few expenses. By extension, increasing your debt-to-equity ratio may lower your small business’s weighted average cost of capital (WACC). The lower your company’s WACC, the higher its present net value.
Disadvantages of a high debt-to-equity ratio
Interestingly, some of the disadvantages of a high debt-to-equity ratio represent extreme versions of the above advantages. For example, a high debt-to-equity ratio may indicate:
- A company’s inability to repay its debts: Past a certain point, a high debt-to-equity ratio may signal that a company doesn’t have the money to repay its debts. Think about it like this: If your company has $5,000 in debts and $1,000 in equity, you have $6,000 in assets and a D/E ratio of 5. Assuming that cash comprises only a part of your assets, you probably don’t have enough money to cover your debts.
- Lower share prices: As mentioned above, within certain limits, higher debt-to-equity ratios lead to lower WACC values and thus a more valuable company. However, in the case of a business with $5,000 in debts and $1,000 in equity, the cost of the company’s debts is nearly the same as the value of its assets. The result is a higher WACC and thus a lower present net value. In turn, each share in your company will be less valuable.
What is the ideal debt-to-equity ratio?
There is no ideal debt-to-equity ratio that applies to every business. When determining what’s healthy for your company, you should consider your industry, your company’s age, and what stage of the business growth cycle you’re in. Younger companies or those that are rapidly scaling may also take on more debt to fund expansion, while established businesses often focus on stabilizing or reducing leverage over time.
Because of these differences, lenders and financial professionals typically evaluate debt-to-equity ratios as trend indicators rather than pass-or-fail benchmarks. While some advisors suggest keeping the ratio below certain levels as a general guideline, real-world examples vary widely. Even large companies such as Amazon have operated with higher ratios at times while continuing to grow. What matters most is how your ratio changes over time, whether your cash flow can support your obligations, and how your leverage compares to others in your industry and growth stage.
Debt to equity and the SBA
In terms of SBA loans, the debt-to-equity ratio comes into play in a slightly different sense. The Small Business Administration’s Loan Fact Sheet mentions the ratio as a metric to evaluate whether the business owner has invested enough of his or her own capital in the business to cover the monthly loan payments:
“The after-the-loan business balance sheet should show no more than four dollars of total debt for each dollar of net worth (i.e., a 4:1 Debt/Equity ratio - may vary by industry).”
In this case, equity is defined as the owner’s net investment in the business.
Limitations of the debt-to-income ratio
The main limitation of the debt-to-income ratio is that there’s no set way to determine what a good ratio is. In order to truly evaluate your business, you’ll need to consider the D/E ratio relative to the industry standard for your particular business. Using the ratio to compare businesses from different industries won’t give an accurate picture of business growth.
Another key point is that there may be different ways to calculate the ratio depending on whether or not you incorporate certain types of debt into the numerator of the equation. Make sure you know exactly what counts as a liability for your desired loan type and incorporate other metrics like debt coverage, revenue trends, and credit scores to get a more holistic understanding of your business’s financial health.
FAQs
How do lenders use the debt-to-equity ratio when reviewing loan applications?
Lenders typically use the debt-to-equity ratio to understand how much leverage your business has and how reliant it is on debt. A higher ratio can indicate more risk, while a lower ratio may suggest the business relies more on owner equity. However, lenders may also review cash flow, revenue stability, and other financial ratios to determine loan approval and terms.
Is a high debt-to-equity ratio always a bad sign?
Not necessarily. A high D/E ratio can signal higher financial risk, but it may be acceptable in industries that rely heavily on debt financing or for businesses with strong, predictable cash flow. It’s also common for growth-stage companies to carry higher leverage while expanding operations. The key is whether your business can repay the debt on time over the life of the loan.
How can I improve my debt-to-equity ratio before applying for a loan?
You can improve your D/E ratio by paying down existing debt, increasing owner equity through additional investment, or retaining more earnings within the business. Another approach is carefully managing new borrowing so that debt growth doesn’t outpace equity. Lenders view a lower ratio as a sign of stability and lower financial risk.
How often should small business owners review their debt-to-equity ratio?
Small business owners should review their debt-to-equity ratio at least once per quarter, especially if taking on new loans or planning significant growth investments. Regular monitoring may help you track leverage trends, spot potential risks, and make informed financial decisions. Keeping an eye on this ratio also helps prepare for lender reviews and loan applications.
