Compares total debt to shareholder equity. Below 0.5 is conservative, 0.5-1.0 is moderate, and above 2.0 is aggressive. Benjamin Graham preferred companies with conservative balance sheets. Rising D/E over time is an early warning sign.
Formula
Description
Measures financial leverage by comparing total borrowings to shareholder equity. High leverage amplifies both gains and losses and increases bankruptcy risk during economic downturns. Benjamin Graham was famously cautious about leverage, preferring companies with conservative balance sheets.
Interpretation
Below 0.5 is conservative, 0.5-1.0 is moderate, above 2.0 is aggressive. Industry context is critical. Utilities and real estate can sustain higher leverage than technology firms. Watch for rising D/E trends as an early warning sign.
Related Quality Indicators
The percentage of revenue left after paying all operating expenses but before interest and taxes. This shows how efficiently the core business runs. Above 15% is generally strong. Consistently expanding margins signal improving business quality.
The percentage of every revenue dollar that becomes bottom-line profit after all expenses. Above 10% is strong for most industries. Persistently high net margins often indicate a company has a competitive moat protecting its business.
Profitability before the effects of debt, taxes, and depreciation. Useful for comparing companies across different tax jurisdictions and capital structures. Above 20% is generally strong. Often used in merger and acquisition analysis.
The percentage of revenue that converts to free cash flow. This is arguably the most honest profitability metric because free cash flow is difficult to manipulate. Above 10% is strong. Capital-light businesses like software companies tend to have the highest FCF margins.
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