debt/equity (D/E) ratio =

The debt/equity (D/E) ratio compares a firm’s long-term debt to its shareholders equity or book value (assets minus liabilities). A firm with no long-term debt would have a zero D/E, and the higher that debt, the higher the ratio. Generally companies with ratios above 1 are considered high debt and those with ratios below 0.5 are low-debt.

However, the definition of low and high varies with industry. Software companies typically carry no long-term debt while banks and utilities often carry high D/E ratios. So you can do a better job of evaluating debt by comparing a company’s D/E ratio to its industry.

To reduce your risk of picking a financially troubled firm, avoid stocks with D/E ratios above their industry average.