What is Debt-to-Equity Ratio?
A leverage metric calculated as total liabilities divided by total equity (or net worth), measuring how much of a business is financed by debt versus owner investment.
Formula
Debt-to-Equity = Total Liabilities ÷ Total Equity
Debt-to-Equity Ratio in commercial lending practice
Higher debt-to-equity ratios indicate greater financial leverage and risk. In commercial lending, this ratio helps assess whether a borrower has adequate skin in the game and how vulnerable the business is to revenue declines. Acceptable leverage varies meaningfully by industry — software companies typically run lower leverage than capital-intensive manufacturers. The ratio is most useful when compared to industry peers and tracked across multiple periods of borrower financials.
Related terms
Related concepts in commercial underwriting
Working Capital
The difference between current assets and current liabilities, representing the short-term liquidity available to fund day-to-day operations.
Read definitionFinancial Spreading
The process of extracting financial data from tax returns, financial statements, and other documents and organizing it into a standardized format for credit analysis.
Read definitionCurrent Ratio
A liquidity metric calculated as current assets divided by current liabilities, measuring a borrower's ability to pay short-term obligations with short-term assets.
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How Debt-to-Equity Ratio shows up in AI underwriting
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