What is the debt-to-equity ratio? — formula, levels and scoring scale

The debt-to-equity ratio measures how much debt a company carries per krona of equity. The formula: debt-to-equity ratio = total liabilities ÷ equity. A ratio of 2,0 means the company has borrowed two kronor per krona of owner capital. One ratio. Two items on the balance sheet. The entire risk profile in one sweep. That is why the debt-to-equity ratio is V10 in AKM1 — and it is calculated before ROE, as the leverage check.

The formula

Debt-to-equity ratio = Total liabilities ÷ Equity

Three conventions circulate, and it pays to know which one you are holding:

• Total liabilities ÷ equity — the broadest variant, including accounts payable. AKM1's calculator follows the linear threshold on the value the company reports as debt/equity.
• Interest-bearing debt (liabilities) ÷ equity — narrower; measures the debt that carries an interest rate.
• Net debt ÷ equity — interest-bearing debt minus cash; the credit analysts' variant.

None is wrong. Never mix them in the same comparison — choose one, keep it, state which one you chose.

Worked example: same company, two conventions

A company with equity of 4 mdr SEK and total liabilities of 9 mdr gets a ratio of 9 ÷ 4 = 2,25. Scored according to AKM1's thresholds: 2 points out of 5. If you instead compute on the interest-bearing debt — 6 mdr — the ratio becomes 1,5 and the score 3. Same company. Same balance sheet. Two different pictures. The difference lies not in the company but in the method, and that is why every analysis in the library states which convention is used.

Which level is dangerous?

The short answer: it depends on the industry — but the thresholds are fewer than many think. Property companies and banks carry structurally high debt; their assets are pledgeable and their revenue often contract-bound, which makes the debt part of the business model rather than a sign of stress. A growth company with fragile cash tolerates far less — when the market closes, the debt locks in place. AKM1 therefore scores the level in absolute terms, and the context is added by the neighbouring variables: ROE's leverage check and cash coverage (V19) together give the picture a single ratio lacks.

The ratio's two walls: the interest rate and time

A high ratio strikes in two ways. First through the interest rate: liabilities of 9 mdr SEK cost around 180 million per year at a 2 percent interest rate, but 540 million at 6 percent — the same balance sheet, tripled cost, and profit squeezed from below. Then through time: a short loan portfolio must be renegotiated often, a long one rarely. So always compute the ratio together with the share of floating interest rate and the maturity of the debt — three facts that stand in the notes to the accounts and the management report. The ratio says how much. The interest rate and time say how much it hurts.

How the debt-to-equity ratio is scored in AKM1 (V10)

Each variable is scored 0–5. V10 follows a linear threshold — lower is better, step by step:

• Below 0,5 ⇒ 5 points
• 0,5–1 ⇒ 4 points
• 1–2 ⇒ 3 points
• 2–3 ⇒ 2 points
• 3 and up ⇒ 1 point
• Negative equity ⇒ unset — the ratio becomes positive on two negatives, which is not strength but acute imbalance.

Each score corresponds to a stress band. A ratio below 0,5 means the owners carry more than half of the balance sheet: a buffer against crises, interest rate rises and recession. A ratio above 3 means the creditors own three quarters of the table — and they are paid before you.

This is how it looks in the research library's latest measurements, motivation reported per analysis: H & M debt/equity 2,26 ⇒ 2/5, Truecaller 0,04 ⇒ 5/5, Industrivärden 0,03 ⇒ 5/5. Same scale. Different companies. Fully traceable scores.

Why V10 is calculated before V09

In AKM1's engine the debt-to-equity ratio is calculated before ROE — not after. The reason is the leverage check: for ROE above 35 % to be able to give the fifth point at all, a debt-to-equity ratio of at most 2 is required. Two companies with ROE 40 % can therefore end up differently: one with a ratio of 0,8 and proven endurance, the other with a ratio of 3,2 — the first gets its point, the other does not. High return on a pile of debt is not capital productivity. It is tightrope walking. The order in the engine makes sure the difference shows up in the numbers, not only in hindsight.

Common mistakes

• Mixing conventions. Total liabilities and interest-bearing debt give different ratios for the same company. The comparison between them is meaningless — the difference says more about your method than about the company.
• Forgetting what looks like debt but does not stand there. Pension commitments and lease commitments (IFRS 16) are obligations paid before the owners. Read the notes to the accounts, not just the headline number.
• Stopping at the ratio. The debt-to-equity ratio says how much, never how it is carried. Interest coverage and cash coverage (V19) answer whether the company can bear its costs — the three belong together.
• Comparing banks with anything. A bank's balance sheet is the business itself — deposits are the company's raw material. Compare banks with banks, or not at all.
• Interpreting negative equity as strength. A positive ratio from two negative numbers is a warning, not a record-low debt.

Go deeper

• The course Debt-to-equity ratio — Stability: the thresholds, the industry differences and the exercises that make the balance sheet sink in.
• How to read a balance sheet in 15 minutes — the map to the items that build the ratio.
• What is ROE? — the other side of the leverage, and the reason V10 is calculated first.

The falsification

If companies with a ratio above 3 survive crises as well as companies below 1 — with steady cash coverage — the hard edges of the thresholds are miscalibrated. The library's cross-tabulations test that question per quarter, and deviations are logged openly.

FAQ

What is a dangerous debt-to-equity ratio?

Det beror på bransch och affärsmodell. Fastighetsbolag och banker bär strukturellt hög skuld eftersom tillgångarna är pantvärda och intäkterna kontraktsbundna, medan ett tillväxtbolag med bräcklig kassa tål betydligt mindre. I AKM1:s linjära trösklar ger grad under 0,5 högsta poängen och grad över 3 endast 1 poäng — och tillsammans med kassatäckningen (V19) syns risken som en kvot ensam aldrig visar.

How do I calculate the debt-to-equity ratio?

Dividera skuld med eget kapital — men var medveten om att tre konventioner cirkulerar: totala skulder, räntebärande skulder och nettoskuld. Exempel: eget kapital 4 mdr SEK och totala skulder 9 mdr ger graden 2,25, medan räntebärande skulder på 6 mdr ger 1,5. Ingen konvention är fel — men välj en och håll den i hela jämförelsen. Kursen Skuldsättningsgrad — Stabilitet övar trappstegen steg för steg.

Why is the debt-to-equity ratio calculated before ROE in AKM1?

Because it is the leverage control. For an ROE above 35 % to earn the fifth point at all, the debt-to-equity ratio must be at most 2 — a high return on a large pile of debt is not capital productivity but a balancing act. The engine's order of calculation makes the difference visible in the scores immediately. It is an example of how AKM1's variables check each other.

Is it enough to look at the debt-to-equity ratio?

Nej — kvoten säger hur mycket skuld, aldrig hur den bärs. Räkna alltid tillsammans med räntetäckning, andelen rörlig ränta och skuldens löptid: skulder på 9 mdr SEK kostar omkring 180 miljoner per år vid 2 procents ränta men 540 miljoner vid 6. Läs även noterna — pensionsåtaganden och leasade åtaganden är förpliktelser som betalas före ägarna.

This is educational analysis, not investment advice.