What Is a Debt-To-Equity Ratio and How Can Investors Use It?

In nutrition science,  there’s a theory of metabolic typing that determines what type of macronutrient – protein, fat, carbs or a mix – you run best on. The debt-to-equity ratio is the metabolic typing equivalent for businesses. It can tell you what type of funding – debt or equity – a business primarily runs on.

“Observing a company’s capital structure is very important as the cost of capital has increased significantly in the aftermath of the Federal Reserve’s steep rate hikes,” says Stash Graham, managing director at Graham Capital Wealth Management. “As debt becomes more expensive to service, companies with larger than average debt burdens must allocate more cash towards paying down debt instead of returning that cash to shareholders through cash dividends or share repurchases.”