Debt-to-equity ratio: how high is too high?
The debt-to-equity ratio divides total liabilities by shareholders' equity, showing how much of other people's money the business uses for each unit of the owners' money. At 100%, liabilities equal equity. It is the ratio banks, guarantors and suppliers most often use to judge financial stability.
Formula
Debt-to-equity = total liabilities ÷ equity × 100
- Total liabilities include not only borrowings but trade payables, accrued expenses, customer advances and every other obligation. It can also be derived as total assets − equity.
- Equity is the owners' stake: paid-in capital plus retained earnings.
If losses push equity to zero or below, the ratio stops being meaningful; the capital deficit itself is the bigger signal.
Worked example
Figures in units of 100 million KRW. With total assets of 18 and equity of 9, total liabilities are 9 (values calculated by the Caveat engine).
| Prior year | Current year | |
|---|---|---|
| Debt-to-equity | 105.1% | 100% |
Retained profit enlarged equity and brought the ratio down from 105.1% to 100%. Keeping profits in the business lowers the ratio even without repaying debt.
Industry benchmarks (2025, Korean listed companies)
Debt-to-equity distribution from the 2025 financial statements of Korean listed companies (excluding finance and insurance). The median and the 25th and 75th percentiles show where a company sits.
| Industry | 25th pct | Median | 75th pct | Companies |
|---|---|---|---|---|
| Manufacturing | 29% | 66% | 127% | 1,686 |
| Wholesale and retail | 32% | 75% | 148% | 181 |
| Information and communication | 24% | 47% | 107% | 352 |
| Professional, scientific and technical services | 23% | 51% | 116% | 154 |
| Construction | 47% | 117% | 203% | 66 |
| All listed companies | 29% | 66% | 132% | 2,594 |
The median across all listed companies is 66%, with half between 29% and 132%. Private SMEs usually have thinner equity and higher ratios, so treat listed-company figures as a reference range.
How to read it
- No universal threshold: there is no single internationally accepted cut-off for debt-to-equity. Countries have their own often-quoted rules of thumb (see the country notes below), but benchmarks vary widely by industry, so no single number decides it; construction normally runs far higher than information and communication, as the table shows.
- What kind of debt: the same ratio weighs differently if it is mostly interest-bearing borrowings or mostly operating liabilities such as payables and customer advances.
- Direction: find out whether it fell because of retained profit or a share issue, or rose because of new borrowing.
Both sides: a low ratio is stable but may mean leaving borrowed-money opportunities unused (see the equity multiplier in DuPont analysis). A high ratio can be manageable when interest is well covered and operating cash is steady. Read it with the interest coverage ratio.
Limitations
- It is a year-end snapshot; repaying just before the balance-sheet date and re-borrowing afterwards makes it look lower.
- Off-balance-sheet burdens such as guarantees or the owner's personal borrowing are not captured.
- Industry benchmarks come from listed companies, whose size and capital structure differ from private SMEs.
- For reference only; it does not replace credit, investment or tax decisions.
See it in your own statements
Upload a balance sheet and income statement and Caveat calculates these for your company.
FAQ
- What debt-to-equity ratio is too high?
- There is no fixed line and it varies by industry. The median for Korean listed companies in 2025 was 66%, with wide differences across industries. Look at the share of borrowings, interest coverage and the trend alongside it.
- How does it differ from the equity ratio?
- Debt-to-equity divides liabilities by equity; the equity ratio divides equity by total assets. They are two views of the same thing: 100% debt-to-equity equals a 50% equity ratio.
- What if equity is negative?
- The ratio cannot be calculated meaningfully. The capital deficit itself is the important signal.
- How can the ratio be lowered?
- Repay borrowings, retain profits instead of paying dividends, or raise equity. Which fits depends on the cash position and interest burden.
Country notes: Korea
- Where does the 200% figure often quoted in Korea come from?
- It is a debt-to-equity target the government set for large business groups during restructuring after the 1997 financial crisis, which became a rule of thumb. It is not a legal or industry-wide standard.
Country notes: Finland
- Can a Finnish company have zero share capital?
- Yes. Since 1 July 2019 the €2,500 minimum share capital for Finnish private limited companies (yksityinen osakeyhtiö) no longer applies, so a company can be founded with zero capital. Very small equity makes debt-to-equity swing widely, so read it alongside the amounts.
Country notes: Norway
- What is the minimum share capital for a Norwegian company?
- Under § 3-1 of the Norwegian Limited Liability Companies Act (aksjeloven), an AS must have share capital of at least NOK 30,000. Newly formed small companies often have equity near that level, which pushes debt-to-equity up.