What it is
Total debt divided by total equity. A D/E of 0.5 means 50 cents of debt for every dollar of equity. A D/E of 2 means twice as much debt as equity.How Buffett thinks about it
Buffett dislikes leverage: "It's insane to risk what you have and need for what you don't have and don't need."The reason: leverage works perfectly until it doesn't. The 2008 financial crisis wiped out hundreds of "high-quality" leveraged businesses overnight when credit markets froze.
What "good" looks like
- D/E < 0.3: conservative, fortress balance sheet (Apple, Microsoft, Berkshire)
- 0.3–1.0: moderate, normal for most quality businesses
- 1.0–2.0: leveraged - usually capital-intensive (utilities, REITs)
- > 2.0: high leverage. Acceptable only if cash flow is contractually predictable (utilities, regulated infrastructure)
Better metrics for fundamentals
D/E uses book equity, which can be distorted by buybacks (which lower book equity) and goodwill (which inflates it). For real-world stress-testing, prefer:- Net Debt / EBITDA (target < 3×)
- Interest Coverage (target > 5×)
- Current Ratio (target > 1.5)