What is a debt-to-equity ratio? — Answers

2 min read

Debt ÷ equityHow it's built

≤ 1Often comfortable

LeverageWhat it shows

What it means

The debt-to-equity ratio divides total debt by shareholders' equity. A ratio of 1 means the business is funded equally by debt and owners' capital; above 1 means more debt than equity. It's a form of gearing and a quick read on how leveraged the company is.

What this means for your company

Lenders use it to gauge risk — a highly geared business has less cushion if trade dips. Around or below 1 is generally seen as prudent for an SME, though stable, cash-generative firms can carry more. As with all ratios, the trend matters most: rising debt-to-equity with flat profits is the warning. Pair it with interest cover to see if the debt is comfortably serviced.

What it means for you

Credicorp lends to your company, not to you personally, and takes no personal guarantee. See business loans or apply online.

Frequently asked questions

What debt-to-equity ratio is too high?

There's no universal cut-off, but a ratio well above 1–2 for a typical SME signals heavy reliance on debt and less resilience. Stable, predictable businesses can sustain more; volatile ones should stay lower.

How is debt-to-equity different from gearing?

They're closely related — gearing is a broad term for the debt-versus-equity balance, and debt-to-equity is one specific way to express it. Both measure how leveraged the business is.