Also known as ‘leverage,’ the debt-to-equity ratio indicates the relative proportion of a company’s debt to total shareholder equity.
Given that debt is looked at relative to shareholder equity, the debt-to-equity ratio is often given greater consideration than the debt ratio for determining leverage and risk. Similar to debt ratio, a lower debt-to-equity means that a company has less leverage and a stronger equity position.
If a company’s debt-to-equity ratio is steadily increasing, it means that an increasing amount of its financing is being sourced by creditors versus cash flows or equity financing.