Debt to Equity
This represents the capital structure of the company, how leveraged the company is, by showing the proportion of debt and equity that the company uses to finance its assets base. The higher the ratio, the more leveraged the company is, creditors can face higher credit risk. The lower the ratio, the less leveraged the company is, and may reflect the cautious nature of business owner. Capital intensive industries tend to have higher ratios.
This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed.
To a large degree, the debt-equity ratio provides another vantage point on a company's leverage position, in this case, comparing total liabilities to shareholders' equity, as opposed to total assets in the debt ratio. Similar to the debt ratio, a lower the percentage means that a company is using less leverage and has a stronger equity position.
Some industries feature higher or lower debt to equity ratios,
Some of the major reasons why the debt/equity (D/E) ratio varies significantly from one industry to another, and even between companies within an industry, include different capital intensity levels between industries and whether the nature of the business makes carrying a high level of debt relatively easier to manage.
One of the major reasons why D/E ratios vary is the capital-intensive nature of the industry. Capital-intensive industries, such as oil and gas refining or telecommunications, require significant financial resources and large amounts of money to produce goods or services.
Another reason why D/E ratios vary is based upon whether the nature of the business means that it can manage a high level of debt. For example, utility companies bring in a stable amount of income; demand for their services remains relatively constant regardless of overall economic conditions.
The industries that typically have the highest D/E ratios include utilities and financial services. Wholesalers and service industries are commonly among those with the lowest.