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 a D/E grade to banks and insurers at all — they're scored on a separate financial-strength card built from return on equity, price-to-book and dividend income.
- 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. The score doesn't ignore their debt, though: when D/E can't be read and the company earns an operating profit, it measures leverage as net debt against that profit instead, which works whatever the equity figure says.
- 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 metrics on the grade card. Its letter grade is set against the stock's broad sector when at least 20 peers report one, and on fixed bands otherwise. Banks and insurers don't get a D/E grade, because leverage is their business model; REITs keep theirs, judged against other real estate companies where there are enough to compare.
The score doesn't add a separate leverage penalty on top of that. Leverage is one read inside the quality pillar, with a hard cap for extreme debt, covered below.
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.
How we score it — relative to peers, not to a rule
Apart from one hard cap for extreme debt, there is no absolute leverage threshold in the Bull Rankings score. Debt-to-equity enters the quality pillar at a weight of 0.8, and it is scored against sector peers rather than against a fixed number.
That's because a fixed number would be wrong almost everywhere. A utility funds itself with debt by design and operates comfortably at leverage that would signal distress at a software company. Scoring both against "D/E under 1 is healthy" would systematically punish entire sectors for their capital structure rather than for their risk.
Two refinements sit on top of the peer comparison:
A hard cap at extreme leverage. Above a debt-to-equity ratio of 3, the score is capped at 0.3 regardless of what peers look like. Peer-relative scoring is the right default, but there is a level of leverage that is dangerous even if an entire industry shares it, and the model declines to award a good score for being averagely over-levered.
A blend with the company's own history, up to 60/40 peers-to-own, ranked against at least three fiscal years. A business that has genuinely deleveraged below its own norm gets credit for it.
The materiality gate — a fix worth explaining
The own-history read has an obvious failure mode, and correcting it taught something about percentile scoring generally.
A pure percentile penalizes near-debt-free companies for tiny movements. Accenture at 0.25, Meta at 0.36, Twilio at 0.14 — all essentially unlevered — would be marked down for ticking up within their own near-zero range, because a percentile only knows rank, not magnitude. Going from 0.10 to 0.14 is a large percentile move and a meaningless real one.
So the own-history component is gated by materiality: its influence ramps from zero to full across a debt-to-equity range of 0.3 to 1.0. Below that, the own read stays silent, because low absolute leverage is genuinely healthy and there's nothing to penalize. Above it, the read bites — and still rewards a genuinely levered company that has brought its debt down relative to its own past.
The general lesson: a percentile answers "how does this rank" and never "does this matter." When the underlying quantity can be near zero, you need the second question answered separately.
What the ratio won't tell you
- Debt maturity. A company with 0.8 D/E maturing in ten years is in a different position from one maturing next year. The ratio can't see the schedule.
- Interest coverage. What matters operationally is whether earnings cover the interest, and that's a different calculation entirely.
- Cash on hand. A business with large debt and larger cash isn't levered in any meaningful sense. This is why the model also carries an EV/EBIT read in the value pillar — enterprise value nets debt against cash, which a P/E ratio ignores completely.