In the previous post we looked at liabilities to equity — the ratio of everything a company owes to everything the owners would keep if the business were liquidated. Debt to equity zooms in on the most dangerous slice of that “owes” pile.
Liabilities include all sorts of obligations: unpaid supplier invoices, tax bills, lease commitments, provisions. Debt — bank loans, bonds, credit facilities — is just one component, but it’s the one that comes with fixed repayment schedules and interest. Miss a payment on a supplier invoice and you negotiate. Miss a debt payment and creditors can force bankruptcy. That’s why isolating debt from the rest of liabilities is worth the extra step.
The math is straightforward: divide total debt by total equity. A company with no debt scores zero — about as safe as it gets. A ratio of 1 means the company owes creditors as much as the owners have at stake. At 3, 5, or 10 times equity, the business is highly leveraged — any downturn or unexpected shock can be catastrophic, because the debt payments keep coming whether revenue does or not. And if debt to equity is negative because equity itself has turned negative, the company is in genuine distress.
Different investors draw the line in different places, and the “right” number varies by sector and country. As a rough filter, staying between 0 and 0.5 screens out a lot of fragile businesses. Costco, for instance, sits at about 0.26 — comfortably in that range, and likely one of the reasons Charlie Munger was fond of it.
On Sponda you’ll find debt to equity as the first indicator under Leverage for any company. You can set alerts — say, get notified if a stock you follow crosses 0.5 — and compare it across companies side by side to see who in a sector is carrying the lightest load.
That’s debt to equity. More metrics in the next videos.