What is Debt-to-Equity Ratio?
The debt-to-equity (D/E) ratio is a leverage metric that compares a company’s total liabilities (or interest-bearing debt) to its shareholders’ equity. It measures the extent to which the company is financed by creditors versus owners and is a primary indicator of solvency risk and capital structure aggressiveness.
How It Works
- D/E = Total Liabilities / Shareholders’ Equity (or Total Debt / Equity for a narrower view).
- A ratio of 1.0 means equal debt and equity financing.
- Higher D/E means more leverage and higher financial risk.
- Acceptable D/E varies by industry: utilities and banks operate higher, tech and pharma lower.
- Track trend and compare with industry medians for context.
Saudi Context
Saudi banks (Al Rajhi, SNB, Riyad) operate with very high D/E because deposits and sukuk are large liabilities relative to equity. Most non-bank Tadawul companies sit in a 0.3-1.5 D/E range. CMA-regulated REITs cap their leverage at 50% loan-to-value, effectively constraining D/E. PIF portfolio companies vary widely depending on lifecycle stage.
Example
A company has SAR 400 million of total liabilities and SAR 600 million of shareholders’ equity. D/E = 400 / 600 = 0.67x. The owners contribute about SAR 1.50 for every SAR 1 borrowed, signaling a moderate leverage profile.