In 30 seconds
- D/E divides borrowings by shareholders' equity: how many dollars of debt there are for every dollar belonging to shareholders.
- Below 0.5 is usually comfortable and above 1 deserves a closer look, except for regulated utilities and networks.
- Share buybacks shrink equity and make the ratio overstate the risk.
- With negative equity, D/E is useless: use net debt / EBITDA and interest coverage instead.
- At banks and insurers, debt is the raw material of the business and is measured differently.
Introduction
On December 31, 2025, McDonald's had negative shareholders' equity of $1,791 million. Work out its debt-to-equity ratio and you get a meaningless number. Is the world's most profitable burger chain going bust? No. This lesson explains what D/E measures, when it's a genuine warning and when it misleads you.
Explanation
The debt-to-equity ratio compares two ways of funding a company: borrowed money (debt) and the owners' money (shareholders' equity). A result of 0.5 means the company owes 50 cents for every dollar its shareholders put in or left in the business. A result of 2 means it owes twice as much as its shareholders have in the business.
Picture two neighbors buying the same $300,000 house. One puts down $200,000 of savings and borrows $100,000 from the bank: a D/E of 0.5. The other puts down $50,000 and borrows $250,000: a D/E of 5. If prices fall 20%, the first still sleeps soundly. The second owes more than the house is worth. Debt isn't bad in itself; what it does is amplify. In good years it multiplies the return to shareholders, and in bad years it multiplies the losses.
Warren Buffett summed it up in his 2001 letter to shareholders with a famous line: only when the tide goes out do you discover who's been swimming naked. Heavily indebted companies look brilliant with the wind at their backs and run into trouble the moment credit gets more expensive.
There are two versions of the ratio, and you need to know which one you're reading. The one almost every analyst uses, and the one you'll see on Kaplio's stock pages, puts only financial debt on top: loans, bonds and notes, short-term and long-term. Other sources use total liabilities, which include accounts payable and taxes owed and give higher numbers. Don't mix them when you compare.
D/E comes from the balance sheet, and it has a cousin worth checking at the same time: net debt, which subtracts cash (it's covered in the lesson on net debt).
Formula
Debt-to-equity (D/E) = Total debt / Shareholders' equity
Total debt = Short-term debt + Long-term debt (including the portion due this year)
Shareholders' equity = Total assets − Total liabilities
Net debt version = (Total debt − Cash and short-term investments) / Shareholders' equity
Example
Worked example: Duke Energy, 2025 annual report. Long-term debt, including the portion due within the year: $87,212 million. Short-term borrowings: 2,624. Total debt: $89,836 million. Shareholders' equity attributable to common stockholders: $51,842 million. D/E = 89,836 / 51,842 = 1.73 as of December 31, 2025. In the table below you'll see 1.67 for Duke: it's the same ratio, calculated from the latest reported quarter as of October 4, 2026.
That's more than three times the 0.5 you'd want from a healthy industrial company. For a regulated utility it isn't unusual: its revenue is set by a regulator and arrives rain or shine, although Duke is already in the watch zone by its own sector's standards.
Your turn. The table compares four US utilities. Before you look: do you think NextEra has a lower D/E than Duke? Then work out how much more debt per dollar of equity the most indebted of the four carries compared with Duke. (Answer: Southern, at 1.95 versus 1.67, or 17% more. Dominion sits at 1.85 and NextEra at 1.93: all four are in the watch zone for their sector.)
The buyback trap: Coca-Cola. At the end of 2025, Coca-Cola had total equity of $34,275 million, but up to that date it had spent $56,423 million buying back its own shares, and that treasury stock is subtracted from equity. Its D/E makes it look heavily indebted when it isn't. Kaplio's Buffett method corrects for this by adding treasury stock back to equity before dividing: with that adjustment, Coca-Cola's ratio drops by more than half and lands below the 0.80 the method requires. The debt hasn't changed; the yardstick has.
Real-data example
| Company | Ticker | Debt to equity |
|---|---|---|
| Duke Energy Corporation | DUK | 1.7 |
| Dominion Energy, Inc. | D | 1.8 |
| The Southern Company | SO | 1.9 |
| NextEra Energy, Inc. | NEE | 1.9 |
As of October 4, 2026, using the latest reported quarter, the four utilities carry between $1.67 and $1.95 of debt per dollar of equity: Duke 1.67, Dominion 1.85, NextEra 1.93 and Southern 1.95. In software those would be alarming numbers; for regulated networks they're normal, though already in the watch zone.
How to read it
How to read it
| Type of company | Comfortable | Watch | High |
|---|---|---|---|
| Industrials, consumer, tech | Below 0.5 | 0.5 to 1 | Above 1 |
| Non-bank financials (asset managers, brokers) | Below 0.5 | 0.5 to 1 | Above 1 |
| Insurers | Below 0.3 | 0.3 to 0.5 | Above 0.5 |
| Regulated utilities and networks | Up to 1.5 | 1.5 to 2.5 | Above 2.5 |
| Banks | Doesn't apply: capital is measured against assets | ||
Kaplio's methods are consistent with this table. The Lynch method asks for shareholders' equity of at least twice net debt, which means net debt / equity of 0.5 or less. The Buffett method asks for a D/E, adjusted for treasury stock, below 0.80. For utilities, the sector guide on the stock pages looks mainly at net debt against EBITDA (below 5.5x) and at whether earnings cover interest, because D/E on its own doesn't tell you whether the debt can be repaid.
Pitfalls and limitations
- Buybacks inflate the ratio. You saw it with Coca-Cola: without a single extra dollar of debt, D/E rises as equity shrinks from buying back shares.
- Negative equity, useless ratio. With negative equity the result is negative or infinite. Switch tools: net debt / EBITDA and interest coverage.
- Which debt gets counted. Kaplio's stock pages use total debt from the balance sheet, which besides loans and bonds can include other financial obligations. If you calculate it by hand from loans and bonds, you'll get a little less.
- Cash doesn't count. Two companies with the same D/E can be in opposite situations if one has its debt covered by cash. Check net debt too.
- It doesn't tell you when debt matures. Fixed-rate debt due in 2045 is not the same as debt that has to be refinanced next year at higher rates.
- Comparing across sectors doesn't work. Duke's 1.73 would be alarming at a software company and is normal at a utility.
Case in point: McDonald's
At the end of 2025, McDonald's had $39,973 million of long-term debt and shareholders' equity of −$1,791 million. Its D/E can't be interpreted. Is it in danger? The same 2025 annual report shows operating income of $12,393 million against $1,582 million of interest expense. Do the division: the business covers its interest with plenty of room to spare. Equity is negative because McDonald's has spent years returning more to shareholders, through dividends and buybacks, than it keeps. That's a financial decision, not a symptom of ruin. Had you gone by D/E alone, you'd have thrown out one of the most reliable cash machines on the market. And the reverse holds: a low D/E at a company with falling earnings protects you from nothing.
Practice on Kaplio
Frequently asked questions
What is a good debt-to-equity ratio?
There's no single number. For industrials, consumer and tech companies, a D/E below 0.5 is comfortable and above 1 calls for a closer look. Regulated utilities run at 1.5 or a bit more, insurers should stay below 0.3, and for banks the ratio doesn't apply. Always compare a company with its own sector.
What does a 1.5 debt-to-equity ratio mean?
It means the company carries $1.50 of debt for every dollar of shareholders' equity. For an industrial or tech company that's high, well above the comfortable 0.5. For a regulated utility, whose revenue is stable, it sits at the top of the normal range. Check net debt and interest coverage before drawing conclusions.
Is 0.75 a good debt-to-equity ratio?
For most industrial, consumer or tech companies, 0.75 is in the watch zone: not alarming, but above the comfortable 0.5. For a utility it would be low. Context matters: if the company holds plenty of cash, its net debt may be much smaller, and if earnings cover interest comfortably, the risk is limited.
What does a 2.5 debt-to-equity ratio mean?
It means the company owes $2.50 for every dollar that belongs to its shareholders. For an industrial, consumer or tech company that's very high, five times the comfortable 0.5. Even for a regulated utility it sits at the top of the watch zone. Before judging, check whether buybacks have shrunk equity and how well earnings cover interest.