Debt-to-Equity Ratio: A Simple Explanation

The debt-to-equity ratio is one of the key metrics used to assess a company’s financing structure. It shows the ratio of debt to equity—and thus how risky your company’s financing is.

What is the debt-to-equity ratio?

The debt-to-equity ratio compares total debt to equity. It is usually expressed as a percentage and provides insight into your company’s dependence on creditors.

A debt-to-equity ratio of 200 percent, for example, means that your company has twice as much debt as equity. At 100 percent, both are equal; at 50 percent, equity outweighs debt.

Why is the debt-to-equity ratio important?

For SMEs, the debt-to-equity ratio is particularly relevant because it directly influences creditworthiness. Banks scrutinize this ratio closely before granting or extending loans. A high debt-to-equity ratio signals risk—both for you as an entrepreneur and for potential creditors.

In addition, the debt-to-equity ratio indicates the risk of insolvency: the higher it is, the more vulnerable your company is to interest rate hikes, drops in revenue, or loan terminations.

Calculating the debt-to-equity ratio

The formula is simple: you divide total debt by equity and multiply the result by 100. Debt includes all liabilities—both short- and long-term debt, bank loans, provisions, and accounts payable.

A concrete example

Imagine your company has debt of 750,000 Swiss francs and equity of 250,000 Swiss francs. The debt-to-equity ratio is calculated as follows: 750,000 divided by 250,000 times 100 equals 300 percent.

This means that your company has three times as much debt as equity—a significantly elevated figure that carries financial risks.

What is a good debt-to-equity ratio?

Generally speaking, the lower the debt-to-equity ratio, the more solid the financing. For Swiss SMEs, the following guidelines are useful: ratios below 100 percent are very good, ratios between 100 and 200 percent are considered solid, and anything above 300 percent should be viewed critically.

However: A certain level of debt is not only unavoidable but also sensible. Debt is usually cheaper than equity and enables growth. The so-called leverage effect: As long as the return on investment exceeds the interest rate on debt, debt increases the return on equity. However, this effect reverses when interest rates rise or margins fall.

Consider industry differences

The assessment of the debt-to-equity ratio is highly industry-dependent. In the construction sector, ratios of 200 to 300 percent are common, while consulting firms often operate with significantly lower ratios. The stage of the company’s life cycle also plays a role: growth companies typically rely more heavily on debt financing than established businesses.

Reducing the debt-to-equity ratio

If you want to lower your debt-to-equity ratio, there are three levers: pay off debt (repay loans), build up equity (retain profits or make capital contributions), or reduce total assets (sell non-core assets).

Findea is happy to help you strategically analyze your financing structure and align it optimally with your business goals.

The Complete Guide at a Glance

This article is part of our comprehensive series on the most important financial ratios for Swiss SMEs. In the complete guide to the 10 most important financial ratios for SMEs, you’ll find all key ratios at a glance—from profitability and liquidity to financing structure.

Formula: Debt-to-Equity Ratio

Debt-to-Equity Ratio (%) = (Debt ÷ Equity) × 100

Also known as the Debt-to-Equity Ratio