What does the debt-to-equity ratio measure?

The debt-to-equity ratio is a financial metric that specifically measures a company's financial leverage by comparing its total liabilities to shareholders' equity. This ratio reflects how much debt a company is using to finance its assets relative to the equity provided by its shareholders. A higher debt-to-equity ratio indicates that a company is more heavily financed by debt, which can be a sign of increased financial risk. Conversely, a lower ratio suggests that the company is relying more on equity financing, which generally signals lower risk.

Understanding this ratio is crucial for investors and analysts, as it provides insight into the company's capital structure and its ability to manage debt levels. It helps in assessing the risk associated with the company's financial strategy and its potential for financial distress, especially in challenging economic conditions. Thus, the debt-to-equity ratio is a critical tool for evaluating the financial health and risk profile of a business.