What it is
The debt-to-equity ratio (D/E) is:
D/E = Total Debt ÷ Shareholders' Equity
"Total debt" should include short-term borrowings, current portion of long-term debt, long-term debt, capital lease obligations, and operating-lease liabilities (post-ASC 842 / IFRS 16). Many screeners use long-term debt only, which understates leverage at companies with heavy short-term financing or operating-lease commitments. The Bull Rankings model computes its own total D/E from the balance sheet — that's the "total" tag you'll see on the metric card.
What "good" looks like
By sector:
- Software and tech: typically under 0.5. Microsoft, Adobe, and most SaaS names operate with minimal debt because their working capital needs are low and their margins fund growth internally.
- Industrials, consumer staples: 0.3–1.0 is typical. These businesses use debt to fund inventory and PP&E but don't depend on it.
- Banks and insurers: 5–15 is normal and not alarming. Their business model IS leverage. We don't apply the standard D/E grade to financials — we use Tier 1 capital ratios and combined ratios instead (which we don't currently surface but inform the sector-specific scoring).
- Utilities, REITs: 1.0–2.0 is structural. Regulated cash flows let them carry more debt safely.
- Above 2.0 in a non-financial: worth investigating. Could be a leveraged buyout aftermath, an aggressive buyback strategy that depleted equity, or genuine financial stress.
Why it matters
Debt levels look fine until they don't. The pattern is brutally consistent:
- A leveraged business with 30% revenue decline can't cover interest expense from cash flow. A debt-free business with 30% revenue decline cuts costs and rides it out.
- High D/E shifts return-on-equity higher in good times AND amplifies losses in bad ones. The DuPont identity makes this explicit: ROE = Net Margin × Asset Turnover × Equity Multiplier. Lever up = higher equity multiplier = higher ROE on the way up and lower on the way down.
- Refinancing risk is invisible until rates move. A company that bought back stock with 2% paper in 2020 looks brilliant — until 2024 when that paper matures and the new coupon is 7%. The D/E ratio captures the principal exposure; the rate environment determines what it costs to service.
Common gotchas
- Buyback-depleted equity. As mentioned in the ROE post, companies like Boeing and Philip Morris have repurchased so much stock that shareholders' equity is small or negative. D/E mechanically explodes to 10+, but the businesses aren't structurally over-levered — they have real cash flow, real moats, and durable credit ratings. We cap the D/E grade at ratio = 10 and treat anything above as a neutral signal rather than a fail.
- Operating leases. Pre-2019 these lived off-balance-sheet entirely. Now they're capitalized as right-of-use assets and lease liabilities. A retailer with hundreds of leased stores legitimately has a much higher D/E than the same retailer ten years ago — the leverage was always there, just hidden.
- Convertible debt. Treated as debt for D/E purposes until it converts. A high-quality growth company with a lot of "in-the-money" converts has artificially high D/E that will resolve into equity if the stock holds up.
- Cash-rich balance sheets. Apple has billions in debt and billions more in cash — net debt is negative. Gross D/E reads as "leveraged"; the economic reality is the opposite. Always pair D/E with the cash balance.
How we use it
D/E is one of the five primary grades shown on every row card. We score it in five bands roughly tracking the sector ranges above. Banks, insurers, and REITs get either an explicit "n/a" or a neutral grade — applying the standard scale to them produces wrong answers.
The model also flags "extreme leverage" as a signed score adjustment: a D/E > 2.0 in a sector where 0.5 is typical drops the score directly, not just through the grade. This double-counts deliberately — high leverage is a survival-of-the-business signal that deserves an extra penalty beyond what the grade alone applies.
Bottom line
Read D/E as "what's the breaking point." A business that can absorb a recession without breaching debt covenants or having to do a dilutive equity raise compounds through downturns instead of getting wiped out by them. The Bull Rankings model penalizes high leverage everywhere except where high leverage IS the business (financials), and you should mentally do the same when you screen on your own.