Borrowing cash can fuel growth, but it comes with consequences. Raise too much debt, and fixed payments shorten your runway. Rely too heavily on equity, and you dilute ownership and long-term upside.
The debt-to-equity ratio helps you navigate the tradeoff. It reflects how much you’ve borrowed compared to how much has been invested. It tells you and your investors whether your capital structure supports long-term growth or hides short-term risk.
This isn’t a vanity metric. It shapes your cost of capital, affects your ability to raise, and determines how much pressure sits on your operating model.
Here’s how to calculate it, what to include, and how to interpret the signal.
Understanding debt-to-equity ratio
Debt-to-equity ratio compares how much debt your company has to its shareholder equity. It’s a financial leverage ratio, which shows how you fund operations using borrowing versus equity financing.
If your ratio is 1.5, you have $1.50 of debt for every $1 of equity. Creditors have more financial claim on your assets than shareholders do. That framing influences how lenders view your risk and how VCs model your upside. Lower than 1 is usually seen as conservative since it means you have more equity than debt.
For early-stage companies, the debt-to-equity ratio is often volatile. A single round or note can swing it sharply. But that’s exactly why tracking it matters. It gives you a normalized view of how your funding strategy evolves over time.
Different ways to calculate debt-to-equity ratio
The standard formula is:
Debt-to-equity ratio = total debt / total equity
But what you count as “total debt” and “total equity” can change based on how you calculate. Here are the main variations you’ll see.
Standard formula using total liabilities
The broadest version of this ratio includes all liabilities:
Debt-to-equity ratio = total liabilities / total shareholder equity
This captures everything you owe (accounts payable, accrued expenses, lease liabilities, short-term and long-term debt) against the sum of shareholder equity: common stock, paid-in capital, and retained earnings.
It gives the fullest picture of leverage, but can overstate financial risk if you include routine operating liabilities.
Long-term debt-to-equity variation
To zoom in on financing decisions, you can use just long-term debt:
Long-term debt-to-equity ratio = long-term debt / total shareholder equity
This filters out operational payables and focuses on how you’ve chosen to fund the business. For early-stage companies, it can highlight deliberate leverage moves, like taking on venture debt.
Market value vs. book value methods
The standard formulas use book values from your balance sheet, but you can also use market values:
Market-value debt-to-equity ratio = market value of debt / market value of equity
Public companies get equity value by multiplying share price by shares outstanding. Debt value comes from the current price of bonds or the present value of what’s owed.
Most startups use book value. You probably don’t have traded securities yet. If you’re going public or have traded debt instruments, market value gives a more up-to-date picture.
Adjust for convertible debt and preferred equity
Startups often raise capital through convertible notes or preferred equity. These financing tools blur the line between what you owe and what you own.
Convertible debt starts as a liability. Log it as debt initially, then move it to equity once it converts. Expect your debt-to-equity ratio to shift significantly during these conversion events.
Preferred equity technically counts as ownership. However, mechanics like liquidation preferences or redemption features often make it behave like a loan. Many analysts treat specific types of preferred stock as debt when calculating leverage.
Classify these instruments based on their economic substance. Treat convertible notes as equity if conversion looks imminent. Count preferred stock as debt if you face an upcoming redemption requirement.
What counts in each category
Debt
Debt is anything that creates a fixed future obligation. Include:
- Short-term debt: Bank credit lines, current portion of long-term loans, short-term notes payable. Due within a year.
- Long-term debt: Term loans, bonds, equipment financing, mortgages. Extends beyond one year.
- Operating leases: Most leases now create a right-of-use asset and lease liability on your balance sheet. Count these as debt.
- Convertible notes: Until they convert, these work like debt. Include them in your debt total.
- Venture debt: Startup-specific loans. They often have warrants but are still debt until repaid.
Equity
Equity includes shareholder contributions and retained earnings. Include:
- Common equity: Common stock at par, extra paid-in capital. Shows what shareholders have put in.
- Preferred equity: Preferred stock and its paid-in capital. Standard practice includes it, though some analysts don’t if it acts like debt.
- Retained earnings: Total profits since you started, minus what’s been paid to shareholders. Startups often see negative retained earnings as they invest in growth.
Hybrid instruments
SAFEs (simple agreements for future equity) don’t fit cleanly as debt or equity. They’re not debt since there’s no payback, and they’re not equity until they convert. Most startups skip SAFEs in both columns until conversion.
Stock-based comp adds another twist. As you grant and vest options or RSUs, you increase equity without new cash coming in. This will shift the ratio over time.
Why timing matters
The ratio is a snapshot, so the date you pull it matters. A big equity raise on the 1st vs. the 29th can change the entire picture.
For consistency:
- Use period-end data (monthly or quarterly)
- Align measurement dates across reporting periods
- Track changes over time, not just single moments
Why the debt-to-equity ratio matters
Understanding leverage and risk
A higher ratio signals more leverage. You're using borrowed money to potentially boost returns. This strategy works well when revenue grows, but it increases risk if things slow down. Unlike equity, debt payments stay fixed regardless of your income.
Your risk profile influences how investors and lenders view your company. A ratio below 1 usually suggests lower risk because you hold more equity than debt. Once the ratio climbs above 2, people start to worry about your ability to repay loans during a downturn.
Checking your coverage
Don't look at debt-to-equity in a vacuum. Pair it with your interest coverage ratio and debt service coverage ratio to confirm you can actually afford your debt.
A healthy debt-to-equity ratio doesn't guarantee safety. You can still struggle with coverage if interest rates climb or profits dip. As we explain in our guide to financial ratios, you need multiple metrics to get the full story.
Balancing your capital structure
This ratio reflects the core of your capital structure. Every startup hunts for an optimal capital structure that keeps costs low while maximizing firm value.
Debt often costs less than equity. Interest is tax-deductible, and lenders simply demand lower returns than shareholders. However, too much debt increases bankruptcy risk. You need to strike the right balance to keep your cost of capital manageable and your business strong.
Managing runway and fundraising
Your ratio impacts your cash runway and future funding options. High debt often limits your ability to borrow more, while low debt might mean you're missing out on cheaper financing.
When you plan your next round, model how the ratio changes in different scenarios:
- Raising equity lowers your ratio.
- Taking on more debt raises it.
Investors look for solid capital structures, a topic we cover in our fundraising preparation guide. Remember that debt turns into fixed payments that accelerate burn. Track cash flow metrics alongside your ratio to build a smarter runway plan.
Benchmarks, rules of thumb, and common mistakes
What’s a “good” ratio? It depends on your industry, stage, and business model.
You can generally follow this rule of thumb: ratios under 0.4 show healthy leverage, while ratios over 0.6 might concern lenders.
Industry and stage variations
Benchmarks shift differently across industries. Manufacturing and utility sectors often run high ratios above 2.0. Asset-light software companies usually target figures below 0.5.
Your growth stage matters just as much. Early-stage startups can report negative equity when losses outpace investment. In that context, the ratio applies less. Mature companies maintain optimal targets based on capital needs and steady cash flow.
Investor and lender preferences
Equity investors like lower ratios since high debt means more risk. Debt holders get paid first, so heavy debt shrinks possible equity returns.
Lenders review your ratio and other metrics to check if you can safely handle new debt. They look at your industry, growth, and cash flows to set limits.
Common pitfalls to avoid
- Keep debt-to-equity distinct from debt-to-assets. Debt-to-assets divides by total assets, whereas this ratio focuses on shareholder equity. You need to know exactly which leverage metric you're analyzing.
- Check for off-balance-sheet liabilities. While accounting standards moved most leases to the balance sheet, other commitments often stay in the footnotes. Include these to see your true financial obligations.
- Classify convertible instruments and SAFEs clearly. These hybrid funds sit between debt and equity until conversion. Choose a consistent method for reporting them to give investors the clarity they need.
- Separate financial debt from operating liabilities. Accounts payable arise from daily operations rather than deliberate borrowing. Most analysts exclude these to get a clearer view of financial structure.
- Adjust your analysis for negative equity. Significant early losses can turn equity negative and break the ratio. Focus on absolute debt numbers and cash burn rates when equity is underwater.
- Factor in stock-based compensation. This expense increases equity on paper without adding actual cash. It improves your ratio visually but doesn't help you pay down debt.
- Benchmark against similar funding stages. Comparing a pre-revenue startup to a Series B scale-up provides little value. Contextualize your ratio based on your specific maturity and capital structure.
- Review debt terms and composition. A 1.5 ratio looks different depending on whether you hold cheap secured debt or high-interest loans. Read the fine print to understand the risk behind the number.
How Runway helps to calculate and track the debt-to-equity ratio
Runway’s financial modeling platform calculates and monitors your Debt-to-Equity ratio automatically. By integrating directly with your general ledger, Runway keeps your metrics live and fully synced with your balance sheet. You get instant visibility into your leverage without updating a single spreadsheet cell. Let's walk through how to set this up.
Automated data integration
Runway connects directly to your accounting system, HRIS, and CRM. Balance sheet data syncs automatically, so you skip the export-and-paste routine. Transactions post and your ratio updates immediately. Sales, marketing, and finance teams see the impact of growth scenarios without waiting for month-end close.
Step-by-step: calculating debt-to-equity ratio in Runway
1. Bring your balance sheet data into a database
Start by creating a database for your balance sheet, like Level 1: Balance Sheet by Account. In the configuration, select your integration query as the Data Source and choose the numeric amount field as your Driver. Add segments for GL Account Name and Account Type to keep things organized.
2. Create roll-up databases for total debt and total equity
Next, build a rollup database called Level 2: Balance Sheet by GL Account to aggregate your Level 1 data. You need a lookup table here to map accounts to a Reporting Category dimension that tags them as Debt or Equity. Finally, create a Level 3: Balance Sheet by Reporting Category database. This rolls everything up gives you one clear amount per category each month.
3. Create drivers for total debt and total equity
Add a drivers table block to your Page. Create a Total Debt driver. For the forecast formula, use the sum() function on your Level 3 database's Amount column. Apply a filter so it only grabs rows where Reporting Category = Debt. It looks like this:
sum(Level 3: Balance Sheet by Reporting Category.Amount [Reporting Category = "Debt"])
Repeat this process for Total Equity, changing the filter to "Equity."
4. Calculate the debt-to-equity ratio
Create the Debt-to-Equity Ratio driver in your table. The forecast formula uses simple division: Total Debt / Total Equity. Wrap it in an ifError() function to handle months where equity might be zero or negative.
ifError(Total Debt / Total Equity, 0)
This keeps your model running smoothly. Your ratio now updates automatically every month as your balance sheet changes.
Integration with broader financial planning
Your ratio connects to your entire financial plan. Runway shows you the full picture.
- Revenue forecasting: Model how growth moves your ratio and impacts debt service.
- Expense management: See exactly how spending shifts affect profits and equity.
- Headcount planning: Show how hiring changes your cash position and funding needs.
- Fundraising preparation: Test financing options and see ratio effects instantly.
Runway connects these functions, so your every team models with the same live data.
Frequently asked questions
How often should startups update their debt-to-equity ratio?
Update strictly on a monthly basis at a minimum for early-stage companies. High-growth or transaction-heavy startups need to update it weekly. Frequent updates help you stay ahead if you take on new credit lines, close equity rounds, or burn cash quickly. Your team spots leverage swings before they turn into actual problems.
What does a negative debt-to-equity ratio actually mean?
A negative ratio happens when shareholder equity drops below zero. This typically results from accumulated losses, write-downs, or major one-time expenses. The ratio becomes less useful as a leverage measure in this scenario. Investors skip the ratio here to instead examine your cash runway, near-term obligations, and gross burn to evaluate solvency.
How do interest rate changes affect the debt-to-equity ratio?
Interest rates don't directly change the ratio since the calculation uses principal rather than interest. They impact it indirectly by increasing interest expense, lowering net income, and reducing retained earnings. This lowers equity over time. A rising-rate environment can worsen your ratio without you taking on a single new dollar of debt.
Should founders include venture debt covenants when interpreting their ratio?
Yes. Even if the debt-to-equity ratio looks healthy, covenant-heavy venture debt can limit hiring, spending, or additional borrowing. Many lenders bake leverage thresholds, minimum cash balances, or revenue milestones into their agreements. Founders need to check how close they are to covenant triggers rather than relying on the ratio alone.
Can software help forecast how fundraising or hiring changes the debt-to-equity ratio?
Absolutely. Modern FP&A tools simulate how different financing or headcount scenarios affect your leverage several months out. Runway connects live balance sheet data to your operating model so you can see how a new loan, declining burn, or upcoming equity round shifts the ratio in real time. You get the data without rebuilding spreadsheets or re-linking formulas.
Stay on top of your debt-to-equity ratio
Your debt-to-equity ratio is a reflection of your capital strategy, your risk appetite, and your future flexibility. Track it consistently, and watch how it shifts with each round or repayment.
Manual spreadsheets often create bottlenecks and invite errors. By the time you sort and calculate the numbers, you are already behind. Runway updates your ratio automatically as your balance sheet changes. Model scenarios, spot trends, and share insights with your team and investors directly in the platform.