Debt-to-equity ratio: which level is dangerous — and when debt is manageable

The debt-to-equity ratio is calculated as the company's total liabilities divided by its equity. A company with SEK 600 million in liabilities and SEK 400 million in equity has a debt-to-equity ratio of 1,5 — there is one and a half kronor of borrowed capital for every krona the owners put in. But the question everyone asks — "which level is dangerous?" — has no universal answer. The same 1,5 is everyday life for a real estate company and alarming for a consulting firm.

What decides whether debt is dangerous is not its size but three other things: what it finances, whether earnings cover the interest with margin, and when it matures. We walk through the formula first and these three questions after.

The formula — and its mirror image, the equity ratio

Debt-to-equity ratio = Total liabilities ÷ Equity

Equity ratio = Equity ÷ Total assets × 100

The two financial ratios describe the same balance sheet from two directions. A debt-to-equity ratio of 1,0 corresponds to a 50 percent equity ratio (half own capital, half borrowed); a debt-to-equity ratio of 3,0 corresponds to a 25 percent equity ratio. Swedish annual reports usually report the equity ratio; international reports more often use debt-to-equity. Convert before you compare.

A definitional question with big effect: do you count total liabilities (including accounts payable, accrued costs, tax liabilities) or only interest-bearing debt? The first form is the accounting standard; the second — net debt against equity — says more about financial risk, because only interest-bearing debt costs money and can be called up. Always state which one you use.

The worked example: three companies, three different truths

• The real estate company: liabilities SEK 7 000m, equity SEK 3 000m → debt-to-equity ratio 2,3. The liabilities finance buildings that generate rental income; long maturities; a 60 percent loan-to-value ratio is the industry standard.
• The engineering company: liabilities SEK 1 200m, equity SEK 1 500m → 0,8. The debt covers working capital and machinery; cyclical earnings make the coverage vulnerable in downturns.
• The consulting firm: liabilities SEK 150m, equity SEK 250m → 0,6. Almost no non-current assets; debt even at this level should raise the question of why a company without heavy assets needs to borrow.

Three numbers, none of them self-explanatory. The real estate company's 2,3 can be the most sustainable of the three — if the interest coverage holds.

Question 1: Does earnings cover the interest — with margin?

Interest coverage ratio = Operating profit (EBIT) ÷ Interest costs

This is the most important check. An interest coverage ratio of 8 means operating profit can fall to one-eighth before the interest becomes a problem. At 2 the margin is thin: a normal dip in the business cycle is enough for the company to end up in negotiations with the banks. Below 1 the company pays the interest with borrowed money or cash — a situation that is time-limited by definition.

Complement it with Net debt ÷ EBITDA: how many years of operating profit before depreciation are needed to pay back the debt. Levels around 1–2 are low for most industries, 3–4 is markedly leveraged, and above 5 puts the refinancing question front and center. Again: the industry sets the scale.

Question 2: What does the debt finance?

Debt that finances assets with their own cash flows — real estate, rental machinery, acquired companies with stable revenue — is structurally different from debt that covers operating losses. The check: compare the debt increase with the investments in the cash flow statement. If debt grows while investments stand still, it is financing something else — often share buybacks, a dividend or negative cash flow from operations. Here the V10 course connects directly to V19 (capital burn): a company that burns cash while increasing its debt has two alarm bells ringing at once.

Question 3: When does the debt mature?

A debt of SEK 5 billion maturing in seven years at a fixed interest rate is a different thing from the same debt having to be refinanced next quarter at a floating interest rate. The note on interest-bearing debt (the liabilities that accrue interest) reports the maturity structure — maturities within one year, one to five years, over five years. Concentrated near-term maturities are a source of risk regardless of the debt-to-equity ratio; that was exactly the mechanism that put pressure on several Swedish real estate companies when interest rates rose in 2022–2023.

The warning signs — the checklist

• A debt-to-equity ratio rising three years in a row without a corresponding increase in assets.
• An interest coverage ratio below 3 in an industry with cyclical earnings.
• Over 30 percent of interest-bearing debt maturing within 12 months.
• Covenants (loan terms) mentioned in the notes to the accounts with wording about "renegotiation" or "waiver".
• Net debt/EBITDA rising while the EBITDA margin falls — deterioration on two fronts.

The exercise: three numbers in 10 minutes

1. Open the balance sheet: count both total liabilities and interest-bearing debt against equity. 2. From the income statement: operating profit divided by interest costs. 3. From the note on liabilities: how large a share matures within one year? 4. Position the company against its industry in the calculator — the V10 cell shows the distance to the industry median.

Next steps

• The V10 course walks through the industry logic of debt with Swedish examples — real estate, engineering, banking, software.
• Read it together with V11 (liquidity) — short-term payment capacity is the debt's second dimension.
• See how the stability row (V10, V11, V19) interacts in the Curriculum and in your own portfolio builder.

FAQ

What is the debt-to-equity ratio — and how is it calculated?

Skuldsättningsgrad = totala skulder ÷ eget kapital. Ett bolag med 600 miljoner i skulder och 400 miljoner i eget kapital har skuldsättningsgraden 1,5: en och en halv krona lånat kapital per insatt ägarkrona. Spegelbilden är soliditeten — eget kapital ÷ totala tillgångar — som redovisas i de flesta svenska årsredovisningarna.

Is there a dangerous level that applies to all companies?

No. The same ratio is everyday life for a property company with long maturities and rental income, and alarming for a consulting firm without heavy assets. The industry, the interest coverage and the debt's maturity structure determine whether the debt is manageable. That is why the V10 course works with industry comparisons instead of universal thresholds.

Vad är räntetäckningsgrad — och varför är den så viktig?

Räntetäckningsgrad = rörelseresultat ÷ räntekostnader, och den är den viktigaste enskilda kontrollen av skuldens farlighet. Vid 8 kan resultatet falla till en åttondel innan räntan blir ett problem; vid 2 räcker en normal konjunkturdipp för att bolaget hamnar i förhandlingar med bankerna. Under 1 betalas räntan med lånade pengar — en tidsbegränsad situation per definition.

Räknas leverantörsskulder med i skuldsättningsgraden?

I den bokföringsmässiga standardformen, ja — totala skulder inkluderar leverantörsskulder, upplupna kostnader och skatteskulder. Men bara räntebärande skuld kostar pengar och kan sägas upp, så många analytiker kompletterar med nettoskuld mot eget kapital eller nettoskuld ÷ EBITDA. Ange alltid vilken definition du använder, annars blir jämförelserna missvisande.

This is educational financial analysis, not investment advice.